Spread Trading

[Mietesh]

Hello PitBull,

Thanks for your Reply to my msg post. From your msg i can understand that you don't Strictly follow iGuru strategy but might be using his Formula sheet to get indications. As I have seen that in iGuru's sheet there was no Spread Trade indication on 26th MAY but you took position of BULL SPREAD and surely in Profitable side now. Its GREAT.

Now from your msg i want to know that upon TWO DAYS of Spread Movement on One side how you decide which type of Spread You can take position of. For Example:- on 26th how did you decide to take BULL SPREAD and not BEAR SPREAD position ?? I would be glad to have your Insight on this so to make my Trading strategy more clear.

Rgds

MIETESH.

 

[PitBull]

LEADM ZINCM
Date 30-Jun-11 30-Jun-11 Spread Gap
17-May-11 105.7 96.3 9.4
18-May-11 110.95 99.4 11.55
19-May-11 111.1 97.5 13.6
20-May-11 113.55 98.55 15
21-May-11 113.3 98.35 14.95
23-May-11 111.5 96.85 14.65
24-May-11 112.9 99 13.9
25-May-11 114.9 101.85 13.05
26-May-11 114.5 102.85 11.65
27-May-11 114.75 103.2 11.55

Posting the charts from the 17th.
As you can see the spread gap increasing to Rs 15 on 20th and then started reducing.

From analysis over the last few months, I have seen the spread gap between Rs 6.6 - Rs 16.75 so I feel that these two levels are key support and resistance now. This will eventually change because there have been levels of Rs-10 to Rs 24 in the past.

The time to buy as per method would have been on the closing of the 21st or opening on 22nd as per two days of spread gap reducing in a row. I missed this and got the trade in late on the 26th eroding potential profit.
Since you are expecting the gap to close or reduce, you short the higher price commodity i.e Lead and go long on the lower priced commodity i.e. Zinc.

If we were expecting the gap to increase, we would go short on the lower priced commodity which is Zinc and long on the higher i.e. Lead.

Also another note of Iguru's which I have not followed is not to trade in the last week before expiry. One of the reasons my last trade was delayed because I was confused whether I should enter a trade with only a few days before the last week of expiry. I have not observed any issues so far because the spread gap stays on track even if the price of the commodity is moving all over the chart but would like to know others' views.

Hope this helps.

 

[Mietesh]

Hello PitBull,

Thanks for your nice reply. As per your method if from 4th JUNE the spread gap of Rs.8.90 (EOD) if it moves on Upper side for next two days (6th / 7th) and remain near 9.75 or so.......then as per your method SHALL one or will you go for Spread Trade as its Two Days rise in a ROW ? If YES then what type of Trade will you create at Spread Gap of Rs.9.75. Just for example you need to think that it moved from 8.90 EOD 4th JUNE to 9.15 on 6th EOD and again to 9.75 on 7th June.

Please throw proper light on my query.

Rgds MIETESH.

 

[Amigo]

Pitbull,
as Mietesh pointed out in the abv post...if someone wants to enter the trade now.. what shud be the strategy? and what possible stoploss and profit target one should keep ?

 

[PitBull]

I am currently :
Short Lead
Long Zinc

If today the spread gap is above 8.9 (which looks likely),
I will stop and reverse (SAR).

My trade is then going to be :
Long Lead
Short Zinc

 

[Amigo]

Thanks Pitbulls for the reply.. my broker has agreed to charge 25% margin for intra market spread.. but for inter market spreads like Zinc and lead ...he is charging full margin for both.. do they charge like this only or should i ask him to reduce the margin for inter market spreads also?

 

[PitBull]

At this point I would like to point out that I am also fairly new to this so its still a work in progress.

I feel (My opinion ) that the stoploss currently should be somewhere between 1-2 i.e. Rs 1000 - 2000 for mini contract and between Rs 5000 - 10000 for full sized contracts. My best guess 1.2.

Sometimes the intraday spread will go against you to over 1.0 before settling back down and going into profit.
If it goes against your spread by 2 points, then I feel you should SAR, because you are almost certainly in the wrong side of the spread.

The risk/reward ratio should be either 1:2 or above. So I aim for a minimum profit of 2 - 4 points.

I asked my broker , Sharekhan , but they could not oblige as they are two different commodities , so I am paying the full margin too. Not fair

 

[Amigo]

Hi again Pitbull,
as you said today we might get an opportunity to sell Zinc and buy Lead.. i will join you in this trade. so that i can watch how the trade grows. .i read about the intra market spreads .. do we get similar results with that kinda spread also? as the margin kept in that is 25% so we can create more spreads..

 

[Mietesh]

Dear PitBull,

Good Posting & Replies to Members Queries. I have one thing to know about Spread.... I read about GOLD - SILVER spread....Do you have idea that what size GOLD and SILVER to create an SPREAD POSITION. As in ZINC - LEAD we do ONE ONE LOT of each ....but in GOLD - SILVER I dont know how it works as it have different Lot size as well different Expiry Dates. Glad to have your input.

Rgds
MIETESH.

 

[Mietesh]

Dear PITbull,

As of now (7.06.11 @ 09.50 PM) I see that Zinc-Lead Spread Gap is 12.55, but looking to Iguru formula there is still No indication of Bull / Bear spread. So what do you think one should do......take Bull position or shall wait for indication in Iguru formula sheet. Your quicker reply backed with some Logic or Analysis would be highly appreciable.

Rgds MIETESH.