Futures trading on spread

Not always, trading strategies involve the use of technical or fundamental analysis. In some cases, the strategy is based on logic and mathematical calculations, and an example of such a strategy can be spread in the futures. This tactic refers to the complex (multi-level) and requires an analytical mind, and to some extent exposure can be applied to any underlying asset.

All the strategies on futures can be divided into simple and complex:

  • simple – tactics, the essence of which is the opening of a long (purchase of futures) or short (sell) position. And, no matter what tools they use, the fact is that the tools used for opening only one position;
  • complex – tactics, the essence of which the simultaneous opening of 2 or 3 positions in the opposite direction. In other words, a trader will open simultaneously a long and short position on a futures contract with one underlying asset and earn on the price difference.

Spread in futures – simultaneous buying and selling of futures on the same underlying asset. This is partly reminiscent of the hedge, but there are still differences. First, the insurance transactions (hedging) is carried out for reassurance open position. In this case the duplicate transaction is closed as soon as the trend is determined with a direction (that is, open 2 trades in opposite directions, after determining the direction of the price of unprofitable is closed).

Secondly, the strategy is based on the fact that whichever side the trend went (after all you can open in one desired direction 2 position, but it is a risk to lose them both), the difference in price at the beginning of the transaction and its end virtually unchanged.

Spreads in futures are:

  • temporary. Opening position in the short and long side on the same underlying asset provides futures with different terms. Accordingly, the spread (also called the term “rack”) can be short or long;
  • commodity. Involves opening of a position in futures with different underlying assets, located in one commodity group for which prices are correlated. For example, wheat and corn.

Spread in futures: a two-tier strategy

Long spread (the rack) is the simultaneous opening position on the purchase contract with the middle period of execution and selling of a futures contract with a distant maturity date. The size of the rack is the price difference between the near and far futures. If the size of the rack increases, the spread increases. Consider the use of strategies on example.

  1. Long spread

It’s June, futures contract And delivery $ 1,000. USA in August is 29.8 rubles per $ 1, and the B contract for delivery in October to 30.5 rubles. The investor buys the August and October futures sells, the price difference between the contracts is -0.7 rouble (“Delta opening”).

Through the month August contract rises in price from 29.8 to 30.3 rubles, October – from 30.5 to 30.7 ruble. Since the underlying asset is the same, the situation when the cost of one of the derivatives (i.e. futures) will be cheaper and one more expensive, are excluded. Thus, the “Delta closing total 30.3 – 30.7 in) = -0.5 and RUB Delta profit” in this case is the “Delta closing” – “the Delta discovery” or (-0,5)-(a-0.7) = 0.2 ruble per dollar or 200 rubles with the whole transaction (0,2*1000).

It is logical that there is a likelihood that the October contract will grow faster August, which means the investor will receive a loss. In this case, it is recommended to open a short spread.

  1. Short spread

In June, the investor opens a short position (sell) in the middle (August) of the contract price 29,8 roubles for 1 US dollar, and buying the October futures contract at 30.5 rubles. In this case, “Delta discovery” is calculated similarly: 29,8-30,5=a-0.7.

In July, the August futures increased to 30.1 rubles, and the October – to 40.1 per ruble. Delta closure” in this case will amount to 30.1 – 40.1 per = -1,0. “Delta’s profit” in this case is in the opposite direction: “Delta open – Delta closing or (a-0.7)-(-1) = 0.3 or 300 rubles from the transaction.

What is a spread in futures for the investor is more interesting depends on the economic situation and its knowledge. Understanding of overvalued dollar or on the contrary, it will go up, determines the further tactics of the investor. Earnings on the spread is a kind of guarantee of risk minimization. Its point is, how much faster will increase the price on the middle or far contract. If the spread will increase – you need to buy, the spread will fall you sell. It is also clear that the strategy will be mirrored if the underlying asset will go down.

successful stock trading with futures

Spread in futures: a three-tier strategy

Even more complex strategy, which includes earnings not on the spread, but on their differences. In such tactics, there are three futures on the same underlying asset with different expiration. Traders call this type of strategy “ butterfly”. Long spread “butterfly” is formed from long middle and short distance spread. Spread short ”butterfly” – short-middle and long distant. In other words, if there are 3 contracts with end dates 1, 2 and 3, the middle spread is the difference between the prices for contracts with dates 1 and 2, far spread is the difference between contracts with prices 2 and 3. The spread “butterfly” is calculated as the difference between the sum (difference) of the near and far spreads.

Consider the example above with the same basic terms: the cost of the August contract in June – 29.8 rubles, October 30.5 rubles (Delta middle spread”: 29,8-30,5 = a-0.7), December – 31,5 (Delta distant spread: 30,5-31,5 = -1)

  1. Long spread “butterfly”

The investor opens a buy position on the middle spread (buys the August contract and sells October) and at the same time opens a short position on the long spread (October contract has already been opened for sale, and therefore, the December contract is purchased). “The Delta discovery” (the difference between the near and far spread) is (a-0.7)-(-1)=0,3.

In July, the value of the contracts changes as follows:

  • the August futures grows from 29.8 to 29.9 RUB RUB;
  • the October futures grows from 30.5 to 30.6 RUB RUB;
  • the December futures  grows from 31.5 to 31.8 rubles.

The size of the middle of the spread remained unchanged and remains equal to negative 0.7, and distant spread is gone: if you open a reading (-1), but now he has become equal to (30,6 31.8 per = -1,2). The total value of the spread “butterfly” at the closing will be (-0,7)-(-1,2) = 0,5. That is, if at the time of opening, its value was 0.3, and now it is 0.5, then the total spread “butterfly” has increased and the investor’s profit will be 0.5-0.3 mm = 0.2 rubles for each dollar.

  1. Short spread “butterfly”

The investor sells the August and December futures and buys October. For example, the cost of the December contract decreased from 31.5 rubles to 31,0, with other conditions. “Delta” in the middle of the spread we have is still the same – (a-0.7), Delta of the closing” distant spread (-1) became at (-0.5). Delta closing” = (-0,7)-(-0,5) = -0,2. “Delta profit” = “Delta open – Delta closing: 0,3-(-0,2) = 0.5 rubles for each dollar of the contract.

Summary: this strategy is difficult to understand just at first glance. Take a pencil and paper, again with a calculator draw all expenses and income, and you’ll quickly see what’s what. The spread in the futures is convenient because it automatically reinsures open trades. Though the profit is not maximum, there is a significant minimization of risks.

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  • Karess 01.04.2017 at 10:06

    Ah, i see. Well th’tas not too tricky at all!”