Butterfly Options » Spread

Commodity Trading Strategies – The Spread

admin — Mon, 18 Jan 2010 23:48:45 +0000

Many of the more common commodity trading strategies actually serve two purposes. The turn of a profit is but one. A hedge is the other purpose. Hedging is a method of minimizing risks by attempting to purchase some form of insurance. As well as minimizing risks, it also usually caps potential profits. One of the strategies to accomplish this is known as the spread.
The majority of the commodities trades do not involve trading the commodity directly, but more in buying or selling a futures contract. “Going long” and “going short” are two of the most basic strategies
To go long means to purchase a futures contract while anticipating that the price will rise before the contract expires. Futures contracts are very similar to stocks or options because vary rarely do the traders or specialists have any actual contact or participation with trading the commodity itself.
Conversely, to go short means to sell the contract while anticipating that the price will drop before the contract expires. Many novices are often perplexed by this strategy. The have trouble wrapping their mind around the concept that the contract is sold by the trader before they even own it.
While the notion may be confusing, the practice is quite simple. While the technicalities remain unseen by the traders, the inner workings are rather simple. The contract is borrowed and the one is bought to make of the shortfall later.
An illustration of this concept is as follows: Trader X sells a futures contract in May for September wheat for $6.00 per bushel. The contract will be written for a minimum amount, which is typically around 5,000 bushels. The price falls in August to $5.40 per bushel. This will yield a profit of 60 cents on each bushel, which equals $3,000, excluding commission. The profits and losses for these ventures are settled daily for trading accounts and the broker balances the books by buying a contract of the same type on the trader’s behalf with the trader’s money.
Effective trading strategies are a combination or different types and lengths of contracts. Throwing in some form of spread is one of the simplest. There are a number of varieties that can be executed, but a simpler approach is sometimes the best move.
An example of this more simple approach is illustrated in this hypothetical situation. In May, the price for a July wheat contract is $5.90 per bushel and for a September contract the price is $6.00 per bushel. By predicting the spread between these two and by anticipating changes before July to greater than 10 cents – and to be correct in that prediction could yield a profit by selling the July and purchasing the September. By shorting July and going long in September, you do profit.
This profit is incurred by watching carefully the behavior of the contracts and acting accordingly. In June, the July contract may have risen to $6.00 per bushel and the September to $6.25 per bushel. By liquidating both positions, in other words, settling both contracts, this results in a 10 cent loss on the July contract, but a gain of 25 cents on the September contract. This means a 15 cent profit per bushel. A small commission will be incurred on the turn around, but it is minute. On a contract that covers 5,000 bushels, this means a net gain of $750.
While a larger gain would have resulted had July not been shorted, but all trading carries risks and it is impossible to predict the future, especially in the stock market, with any degree of certainly. Hence, the term, speculation is used to refer to these activities.
There is an element of rationale for betting against yourself by shorting and by going long at once allows the trader to hedge their best on whichever direction they expect the market to take. Utilization of this spread strategy as well as with many other variations does succeed in capping the potential for profit. However, it does work to minimize downside losses as well.

Option Spread Strategies: Trading Up, Down, and Sideways Markets (Paperback)

admin — Tue, 15 Dec 2009 11:57:52 +0000

Review

“An excellent guide for learning how to trade option spreads. Saliba offers in-depth discussions on how and when to employ these advanced strategies and to manage the risk of each position.” Peter LipskyTrader, Pan Capital

Saliba is back with the best option trading strategies for all markets, whether they are trending up, down, or sideways. Exercises and quizzes are included to reinforce lessons throughout the book.

See all Editorial Reviews
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Trading Forex, Shares and Commodities

admin — Sat, 05 Dec 2009 14:39:19 +0000

As the major economies start to stabilise and the risk of a depression fades into the distance many are reflecting on a few important points. Firstly, how did it all happen? Secondly, how can they better protect themselves in the future?If we were to be honest with ourselves, then we should probably accept that we can improve on at least a couple of the following:1) Tax efficient investments2) Long term investments3) Actively reviewing our existing invests, and4) Looking at new opportunities that the financial markets are currently providingOf course, not everyone is sitting on their hands. Many actively trade stocks and shares. Whilst others regularly review their banking and mortgage arrangements.A more common form of trading that people are turning to is spread trading or spread betting. It offers a good number of benefits compared to traditional share trading and the ease of access, speed and number of trading opportunities make it an attractive option.Before we proceed though, it should be pointed out that, as with all forms of investment, there is a downside and you can lose more than your initial stake. So why spread trade?Put simply, there are many advantages.One key advantage is the wide range of financial markets on offer including forex, shares and commodities. You can trade the Euro/Dollar, you can trade US, European and UK shares you can trade both Oil and Gold.Note also that, as spread betting does not involve the transfer of ownership rights and it is simply a bet, it is not liable for stamp duty, income tax or capital gains tax*.Being able to ’short’ a market provides interesting opportunities. You do not have to speculate on markets to go up. If your research suggests that the Dollar/Yen exchange rate will go down you can speculate on it to go down. If your research indicates that Crude Oil will go up you can still spread bet on it to go up.So whilst there are a good number of positives, it is important to understand the negatives.Spread bets carry a high level of risk to your capital, you should only speculate with funds you can afford to lose. Like the adverts say, before trading, please ensure that spread betting matches your investment requirements. Familiarise yourself with the risks involved. Seek independent advice where necessary.The Financial Services Authority regulates the UK spread betting firms. This helps to ensure a certain level of quality or, more importantly, client protection. There are a number of regulated companies that offer thousands of international markets including companies like FinancialSpreads.com and PartyMarkets. Naturally, they both offer the normal benefits of spread betting including; tax free trading*, trading outside market hours, no brokers fees and no commissions.* Based on current UK tax law, if you pay tax in another jurisdiction then tax law may vary.

Seasonal Spread Trade for Consistent Returns

admin — Wed, 25 Nov 2009 01:42:40 +0000

www.TransWorldFutures.com

Seasonal Spread Trade for Consistent Returns

Spread trading is a unique trading concept not all that familiar to the average commodity investor. The typical commodity trader analyzes a particular market, either from a technical or a fundamental standpoint, sometimes combining the two; makes a determination as to whether the market exhibits either a bullish or bearish bias, and then wagers by going long a futures contract or purchasing a call option, or by going short a futures contract or buying a put option. There are a number of variations on the theme, but the idea is basically the same.

The following demonstrates the inherent disadvantages, in the above two scenarios, of an outright futures position or the purchase of an option;

1. Size of account. The average investor has a limited account size, and can only withstand a certain amount of drawdown associated with any particular trade. The limited size of trading account necessitates the placement of a protective stop order above or below the position. The premature assumption of a position and the inherent volatility associated with commodity markets leaves the position vulnerable to a one or two day move that triggers the stop order, sidelining the trader as the position oftentimes turns back around. As the market moves in the trader’s favor, the advisability of using trailing stops, adjusting the protective stop in the direction of the trade makes sense in theory, but oftentimes the market will open well above or below the stop order, blowing out the stop and oftentimes taking away a substantial amount, if not all of the profit that was being locked in.

2. Time. In the case of an options purchase, you are basically purchasing time. As the purchaser of an option, the time clock and the calendar become your worst enemy. The value of your option depreciates as you wait for the market to move in your direction. Typically the purchaser of an option witnesses the market go up and down, as the value of his option changes, all along the remaining time value decaying on an accelerated curve as the option expiration day grows nearer.

Spread trading on the other hand, is a way of effectively combating the above two problems. Time no longer is an enemy and volatility, to a certain extent, is effectively reduced. Margins are substantially less due to the relative conservative nature of the “hedged” trade, which the commodity exchanges themselves recognize. Margin requirements, for a spread, can be reduced anywhere from 20% to 90%

Spread trading has no directional bias. The market can go up or down, the trade is based only the relationship between the long and the short position, i.e.- as long as the long side of your spread outperforms the short side you will be profitable. Spread trades can be in the same commodity with different delivery months (i.e. buy July Lean Hogs and sell December Lean Hogs), or different commodities (i.e. buy March Swiss Franc and sell March Australian Dollar). Generally speaking, both sides of the trade will have the same overall directional bias, as in being both long and short in the Grains (long July Corn/short March Corn) , or in the Meats (long Live Cattle/short Feeder Cattle), or in the Metals (long Gold/short Silver). This allows for the built in “hedge”.

Seasonal spread trading is another opportunity to take advantage of this manner of trading. As there are many seasonal tendencies associated with various commodity markets, there are also seasonal tendencies associated with seasonal spread trades. Seasonality is a seasonal cycle that forms a similar, reliable pattern every year for many years.

Reliable seasonal tendencies are all around us.

Everyone is familiar with weather seasonality. In the winter months the temperature is colder than in the summer months.

Farmers will plant crops and harvest crops at about the same time every year.

In the summer months, Crude Oil is usually higher than in winter (because people drive cars more in summer).

In the winter months heating oil is usually higher than in the summer (because more people are trying to stay warm in winter).

At TransWorld Futures, www.TransWorldFutures.com, we go back over 15 years of research and analyze high percentage seasonal spread trade patterns. If a commodity doesn’t exhibit a high seasonal correlation, it is tossed out of the data base.

Any spread trade that has been successful 80% of the time or better over the past 15 years is certainly a possible candidate for exhibiting a seasonal tendency and worth analyzing further. Once the high percentage entry and exit dates are determined, it is time to examine the trade on the technical setup. Is the spread overbought or oversold, what are the resistance points? Basically does the trade look technically as well as fundamentally sound. There are a number of advisory services that offer seasonal spread trade recommendations based on historical analysis, but, by ignoring the technical set up, may result in entering the trade too early, resulting in unnecessarily large draw downs, or in entering too late, missing the trade altogether. We attempt to alleviate the stress, and do the leg work for you. The results from this unique form of trading have to be seen to be believed. Please contact one of our friendly brokers today, and learn about one of the most consistent trade indicators.

Rob Rutger

Senior Analyst

TransWorld Futures

Rob@TransWorldFutures.com

Toll free: 1-877-843-4519

International: 011-813-241-1902

Fax: 1-813-241-1927