Spread Trading

Discussion in 'Professional Trading' started by bathrobe, Mar 14, 2008.

  1. bathrobe

    bathrobe

    As I am always trying to expand my trading opportunities and do not want to ever stop learning I have come to spread trading which I know little about. Buy front month, sell latter month? Using a contract with hypothetical analysis why would one wheat contract rise and the next month fall at the same time?

    Any help is appreciated
     
  2. bathrobe

    bathrobe

    say wheat has been destroyed and the abount thought to be available is far less, wouldn't both the front month and the latter sell off:confused:
     
  3. It's better to say that the contract you buy rallies more than the contract you short sell. There can be times when the thing you buy goes up AND the thing you short-sell goes down. You buy the strength and short-sell the weakness.
     
  4. bathrobe

    bathrobe

    Thank you, would all analysis in a spread trade be fundamental, based on crop reports, NFP number and others?
     
  5. You can start "there" but ultimately it will boil down to "price".......where you get in and where you get out with a profit or loss.
     
  6. blindly spreading has no more value than any other strategy - warrants, options, futures, currencies, etc. There are too many newbie traders who wander in, think that somehow there is magic in trading something like options, lose their shirt, and disappear from ET.

    It is all about finding an EDGE in trading. If you don't have one, it is little better than going to the casino. The HOUSE has the edge, and soon, they will have your money.
     
  7. bathrobe

    bathrobe

    I have an edge in index futures and currency futures an forex, I am simply trying to understand spread trading fully. If you do not wish to help please do not reply.
     
  8. If the front month rises relative to back month, it is a backwardation:
    http://en.wikipedia.org/wiki/Backwardation
    http://www.investopedia.com/terms/b/backwardation.asp
    http://www.investopedia.com/articles/07/contango_backwardation.asp
    A shortage of supply, increase of demand or both, is suggested.

    If the front month declines relative to the back month, it's a contango:
    http://en.wikipedia.org/wiki/Contango
    http://www.investopedia.com/terms/c/contango.asp
    An excess supply, decreasing demand, or both is suggested.

    You can use fundamental analysis to make your spread trading decisions, but ALWAYS confirm them by technical analysis.
    If fundamental analysis, crop reports, climate forecasts, etc. suggest a backwardation/contango and it doesn't develop; don't enter the trade (at least not until it's confirmed in the charts).
    Either your analysis is wrong, or it has already been priced-in long time ago.

    Reality rules (not talking about TV shows).

    Which broker are you using for spread trading?
     
    Adam777 likes this.
  9. The house has an edge?
    Didn't knew there was a house in the financial markets.

    This 'the house always win' reminds me of those paid newsletters advocating selling options (without hedging).
     
  10. scaban

    scaban

    The house is everyone who isnt you. The opposite end, the broker, slippage, market makers, interest rates, etc.

    Spread trading is problematic if the comissions are high, as most spreads require dozens of contracts to be profitable. I think you need a deeper understanding of pricing in options to be profitable in spreads. Hell even naked options.
     
    #10     Mar 15, 2008