The growing uncertainty in trade markets have influenced traders to go away of their traditional strategies and adopt some innovative ones to minimize losses and manage risks. Spread Trading is among such innovative strategies that has lately gained attention and interest among the traders’ community.
As the name indicates, Spread Trading signifies a simultaneous purchase of a futures contract and sale of a related futures contract. A trader makes profit from the change in difference between the two contracts. Therefore, the risk shifts from future contracts’ respective price fluctuations to the difference between two contract prices.
In general, there are three types of futures spread trading. They are listed as follows:
An Intramarket Spread is based on traders’ choice of taking risks in the same market, but in different contract months. For example: a spreader might choose to take spread opportunity by
going long on, say, December’s Wheat contract and, at the same time, going short on January’s Wheat futures contract, or vice versa.
An intermarket spread is based on traders’ choice of taking risks in different markets in the same contract months. For example: a spreader might choose to simultaneously going long on, say, May’s Wheat contract, and the same month’s Soyabean contract.
An interexchange spread can be both an intermarket and intramarket spread. Here, a spreader might choose to simultaneously place long and short future spread contracts in similar markets, but on different exchanges.
Benefits of Spread Trading
- No Real-Time Data Needed: A trader doesn’t need to be online all the time; s/he can simply use end-of-day data to derive further strategies. A great thing for those with full-time jobs!
- Low Margin Requirements: Compared to naked future contracts, trading spreads has less margin requirements. It allows traders with small account balances open more positions.
- High Margin Returns: Compared to naked futures contracts, a spread contract offers at least 115 times more returns.
- Low Risk: Spread trading is comparatively less risky than naked futures contracts, for it is based on the difference between two related contracts than their individual performances. A related future contract is more likely to move in the same direction.
Spread Trading through GeWorko Method
CFD broker IFC Markets recently introduced a customized approach to study two related contracts. Titled PCI GeWorko, the new method helps spread traders build charts between different trade portfolios to examine relative changes in price, their speed and degree of sensitivity to common economic factors.
The PCI GeWorko also brings up endless number of financial instruments and analytic tools to enable traders compare almost any financial instrument with one another. Professional traders can further use these tools to design personalized strategies.