Spread Trading - $Neutral or Quantity Neutral?

Discussion in 'Commodity Futures' started by blackstormcap, Sep 19, 2011.

  1. Hello I am an equity guy, so pardon my ignorance.
    In equity, we usually construct long and short positions that have the same $value so that we profit on convergence in % term.

    In commodity, how do you usually construct a spread? Say if i wanna do a Platinum/Palladium spread, is it "usually" done 1. $neutral or 2. size neutral (in terms of troy ounce)?

    if palladium (pa) is at $720, platinum (PL) at $1780.
    which is usually done?

    1. PL $position = 89000 (1780*50), PA $position = 72000 (720*100), so 1.24 PA contract for each PL contract.

    2. PL size = 50, PA = 100 ounces, so 0.5 PA for reach PL contract.

    since what i am betting is convergence in % term, i am leaning towards $neutrality, but seems that a lot of people trade on size neutrality :confused: