A spread is defined as the sale of one or more futures contracts and the purchase of one or more offsetting futures contracts – but what makes spread trading attractive as opposed to outright futures?
A spread tracks the difference between the price of whatever it is you are long and whatever it is you are short. Therefore the risk changes from that of price fluctuation to that of the difference between the two sides of the spread. The spreader is a trader who positions himself between the speculator and the hedger.
Rather than take the risk of excessive price fluctuation, the trader assumes the risk in the difference between two different trading months of the same futures, the difference between two related futures contracts in different markets, between an equity and an index, or between two equities. Spread trading is a rather obscure instrument and one that Options traders are already familiar with.
What Makes Spreads Better?
Do you see how nicely this spread starts trending in the last week of May? Whether you are a beginner or an experienced trader, whether you use chart formations or indicators, the existence of a trend is obvious. Spreads tend to trend much more dramatically than outright futures contracts. They trend without the interference and noise caused by computerized trading, scalpers, and market movers, this means less false trends and stop runs.
Spread trading offers more solid trends:
Options Spread Trading vs Futures Spread Trading
Personally I understand spreads very well, even foreign currencies are a kind of spread since you are selling one while buying the other, they too offer more solid trends than outright equity futures. Then it’s Options that have the most complexity and rather obscure pricing structure, they offer unique risk / reward over a limited price movement of the underlying stock.
Futures spreads are much less complicated than Options and easier to understand, they have however much smaller margin requirements than outright futures contracts, in fact as much as 90% less! Things that influence spread trends are seasonal commodity factors, correlation between other markets and the commodity the spread is on, as well as ordinary price derived indicators, like the ones we are all familiar with, they can be used to identify the inner trend forces that are about to move the charts.
Spread trading always has something unique to offer, in the case of stock option trading, for example, you cannot sell naked Options and profit from time decay because the margin requirements are too large (At least $100,000), but if you implement a symmetrical spread by buying long dated Options while selling equal number of near dated Options, then the margin requirements are much, much smaller and you can profit from the unequal time decay on these Options.
Stock Market Investing Tips by..
Scott Smith – Investing In The Stock Market © 2008 – 2010
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The difference between buying straight call/put of xyz and spread of xyz is as follows,
1) Let’s take xyz is corrently $60 and paid $6 Premimum(\ ($600)
If xyz moves to $70- Itis a $10 jump therefore your profit will be Price jump- Premimum=$10-$6=$4
So you make 67% profit
2) Foe spread xyz You r going to buy 60 call month for $4 and sell 70 call same month foe $2
So buy buying spread you spend less, volitality cancells each other,your break even point will be smaller
when i check which ones double faster, at the beginning the spread seams moving faster, but after a while the straight call/put seems to move incredibily faster and make 10x 40x 200x etc
If u ask me which one (Spread or straight call/put). I will buy Spread for the following important reasons
a) Buying volitailty and Selling volitalit can reduce volatality crush
b)My breakeven point on the spread will be smaller and that can help me buy more shares of xyz
etc