Spread Trading - Strategy & Calculation

[iGuru]

Spread margin required = 25% to 50% of margin amount required for naked trading per lot. (it's depends on the broker)

eg: Gold margin is around Rs. 80,000 so for spread in Gold you will be required a spread margin of = 25% x Rs. 80,000 = Rs. 20,000 per lot. (same way you can calculate for other commodities, generally broker ask for Rs. 25K - 30K for Gold spread).

For spread between Lead & Zinc, I always assume it at 50% for me. in this I just have to inform my broker that it is a spread position rather than a naked position.



>>>>Hi iGURU,u told that margin of gold is 80k for naked position. And 25% of 80k that is 20k for spread .how it is possible? I think we are taking more than one position of different months for spread.the margin should be double .

Hi Tradejack,

Yes you are right. For doing spread in Gold we need double margin. That's why I mentioned that for spread trading you want Rs. 20,000 per lot and in spread it involves minimum two lots of different contract so your margin will be Rs. 20,000 x 2 = Rs. 40,000.

Thanxs Tradejack for pointing it out and Sorry to all for not explaining it clearly. I hope now it's clear to all w.r.t spread margin.



Regards,

iGuru

 

[iGuru]

Sir,I wanted to ask u .
how did u decide to close the open positions ..
Do you wait till expiry of contract ???

Because You told to go for bullspread when
Bullspread Range > Spread Gap
..but i didnt get when you decided to close the position.
did you close when
Bullspread Range < Spread Gap ??

Hi dewashish,

To close my position, I look into one factor only and that's what is my set target for that position. Like on 1st Oct, I took a bull spread for Lead & Zinc, sold Lead @ 102.55 & buy Zinc @ 99.35 which gave me a spread gap of Rs. 3.20. In this I decided to close my Trade when the spread gap will come to zero. And as of now today spread gap is 0.30 giving me a M2M gain of Rs. 14,000 per lot.

Other option is that if you have taken the bull spread then when the spread gap = Bear spread Range, then you can square off your position and vice verasa.

Current my target for spread in:
Gold is Rs. 70-50
Lead & Zinc is Rs. 2-1


Regards,

iGuru

 

[Pralhad]

Respected Guruji,

Thank you very much for this thread and effort you have taken to calculate all this stuff and also sharing with us.

I have one practical question regarding Margin Requirement. My broker is RK Global. When I initiate Gold spread he block the full margin for two leg (Rs. 160k) for that day and release it next day up to 25% for Gold (Rs. 40k). Therefore we need atleast 160k for one day. Is it possible to initiate Gold Spread with just Rs. 40k?

Is it same problem with you also? or you can initiate gold spread with just Rs. 40k?

Thanking you very much.

Regards,

-Pralhad

 

[tnandkumar]

respected guru sir,
Thank u very much for explaining a wonderful strategy.sir i have few doubts pls reply when u r free

1. if we follow the guideliness given by you (spread gap > bull spread range and spread gap < bear spread range ).what r the other reasons which can make our position in loss.

2. what are the approx values of the difference between spread gap and spread ranges.whare we can start taking positions.

3.can u please tell me the reasons why the difference between between the spread gap and spread range should come near to zero.(is it only beauz it is nearing expirey)

4. if possible can u explain with an example ,if our position gets in a loss what can be the maximum loss.

Sir i am new to spread trading,pls take little time to explain,if u feel my questions a irrelevant ignore them.
thanks in advance
regards

nand kumar

 

[tnandkumar]

sir very nicely explained,thank u very much.i have few doubts pls reply when u find time

1. if we do every thing as per ur rules (gap>bull spread Range and gap<bear spread range).what r the other reasons where our positions will go in loss.

2. we have disscussed spread gap should be greater than or lesser than . but how much it should be (approx value).

3. can u explain with an example what can be a maximum loss if we go into a lossing trade.
thanks in advance

regards

nand kumar

 

[dewashish]

Sir,
Sorry for confusion again
but your excel sheets showed you closed position ..
Bullspread when Spread gap was 1.85 on 9th Aug..also Bear spread was -0.43..
Infact i opted same strategies ..but never was able to decide my targets..
Please help again..& explain..

 

[iGuru]

Sir,
Sorry for confusion again
but your excel sheets showed you closed position ..
Bullspread when Spread gap was 1.85 on 9th Aug..also Bear spread was -0.43..
Infact i opted same strategies ..but never was able to decide my targets..
Please help again..& explain..

Hi Dewashish,

I have just given an example to make all understand. If you will look on 2nd Aug spread gap it is at Rs. 4.65 and I closed my position at Rs. 1.85. This gave us a profit of Rs. 2.8 within 7 trading days which is a good amount. .......... if we have waited for some more period like till 18th Aug we must have made mare around Rs.5 which comes to Rs. 25,000 per lot.

It is totally depends on you when that how long you can wait & take the risk....... In Lead & Zinc if you will get Rs. 1.5-2 per lot is a good return.......



Regards,

iGuru

 

[iGuru]

Respected Guruji,

Thank you very much for this thread and effort you have taken to calculate all this stuff and also sharing with us.

I have one practical question regarding Margin Requirement. My broker is RK Global. When I initiate Gold spread he block the full margin for two leg (Rs. 160k) for that day and release it next day up to 25% for Gold (Rs. 40k). Therefore we need atleast 160k for one day. Is it possible to initiate Gold Spread with just Rs. 40k?

Is it same problem with you also? or you can initiate gold spread with just Rs. 40k?

Thanking you very much.


Regards,

-Pralhad

Hi Pralhad,

Initially software (Risk Mngt.) doesn't understand that you are taking a spread position at the time of execution, after market gets closed and settlement carry on at that time they adjust it....... which was happended with you in RK Global.

One thing you can do (not sure whether RK Global Risk Mngt will do or not, but mine does) you can call them and tell them that you have taken a spread position and provide the desired exposure after adjusting the spread margin required for it.

It is one of the reseon I don't do spread in my RK Global A/c.(except for Jobbing). I have an account with Angel & MK Commodities....... where they provide me the default intraday exposure of 2-3 times which helps me a lot for trading (doing spread & intrday trading).

It also depends on your relation with your broker (Specially with there Risk Mngt team)

As of now I never faced any problem in executing the spread.



Regards,

iGuru

 

[balaj78]

As I already discussed in my previous article Spread Trading - A Simple Trading Strategy for Maximizing Your Profits about some basics of Spread trading.

Link: http://www.traderji.com/commodities...trading-strategy-maximizing-your-profits.html

Here, I will focus on the different strategies for spread trading and to calculate how to find the spread opportunity.


But before going forward, I would like you to remember few thing w.r.t. Spread:

Do spread on Gold, Silver, Copper, Zinc and in cross commodities like Lead & Zinc. (Currently ignore any other commodities or combination of commodities....... Im working on it and will keep update on time to time.)

Never do spread in any commodities for last 7 trading days before contract expiry.

For any abnormal behaviour in spread, always check for some market news (which must have affected it) before taking the spread position.

For spread calculation use maximum 20-25 days of historical data.

Every day your spread differences keep on changing, so we need to update it on daily basis to understand the spread gap and to apply the strategies.

In spread trading, you will gain in one contract and loss in another, very rarely you find that you gain in both the contract.

Don't do spread in Gold & Silver for Dec expiry contract (As I never find a good opportunity for spread)


Now we will come to the strategy:

There are two types of strategies for Spread: Bull Spread & Bear Spread

Bull Spread
This strategy is applied when the spread gap between the two contracts (Gold Far month contract Gold Near month contract or Lead Oct contract Zinc Oct contract) is more or widen.

Bear Spread
This strategy is applied when the spread gap between the two contracts (Gold Far month contract Gold Near month contract or Lead Oct contract Zinc Oct contract) is less or narrow (gap between the two contract become Zero or negative figs.)


Calculation:

Here, Im taking the example of spread between the Lead & Zinc (my favourite one):

First take the historical data for last one month from MCX website (mcxindia.com Market Data Bhav Copy Bhav Copy Commoditywise)

Then take the spread gap between the closing price of each day (Spread Gap = Lead Closing Price Zinc Closing Price) for last one month

Take the "Average" of those spread gap of the closing prices and also the "standard Deviation" of those spread gap of the closing prices for last 20-25 days.

Now we will have two figs........ that is Average & Standard Deviation.


Now comes the final part that is the decision making and implementation of Spread strategy:

Bull Spread Range = Average + Standard Deviation

If the spread Gap > Bull Spread Range, then we will go for Bull spread strategy. It means we will Sell the far month contract or Lead contract and Buy the near month contract or Zinc contract.

Bear Spread Range = Average - Standard Deviation

If the spread Gap < Bear Spread Range, then we will go for Bear spread strategy. It means we will Buy the far month contract or Lead contract and Sell the near month contract or Zinc contract.


Important point:

I have attached an Excel file: Spread Analysis Lead & Zinc for your reference to understand the calculations.

For calculating the spread gap between the two contracts, I always subtract from Far month to near month contract for spread calculation. If you will change this calculation scenario then your strategy will also change.

For lead & zinc spread, I found that there Bull & Bear spread gap is around Rs. 2.5 to 0 even to -0.5. Any time if you find a spread gap of Rs. 4 to 5 or Rs. -2 to -3 will be a very good opportunity for spread in Lead & Zinc.

For Gold, Bull & Bear spread gap is around Rs. 140 to 80/70.

Same way you can find the spread gap for other commodities also. Continues study and watch will help you to understand the spread gaps for different commodities.

If anyone can have it live for intraday then it will be a very good opportunity to do & apply spread.


Regards,

iGuru

hi ,
Thanks for sharing your valuble information .Can u help in to how to get the average and stddev in excel after entering all the value automatically .

 

[iGuru]

hi ,
Thanks for sharing your valuble information .Can u help in to how to get the average and stddev in excel after entering all the value automatically .

Hi Balaj78,

I have attached an excel file in the article (formula & criteria is there for calculating Average & StdDev)....... there you will find evrey thing w.r.t your query. If you still have the problem then we will discuss it.



Regarrds,

iGuru