Track 'n Trade Futures End of Day Spreads
Lan: In this session, we want to cover the inter-commodity spreads. The inter-commodity spreads are the most volatile spreads of all three types that we've been discussing. This is fairly obvious when you think about it, this type of spread entails the simultaneous the purchase of one commodity and delivery month, and the sell of another but different but related commodity but with the same or similar delivery month. These spreads are commonly done and can theoretically include any commodity against any other commodity. However, only a few of the combinations of inter-commodity spreads are exchange recognized and receive a break in margins.
Usually margins for spreads are lower. Here is a list, we're looking at a list on the screen of the more popular inter-market spreads by commodity group. Remember, an inter-commodity spread involves buying a futures contract and selling a similar but different commodity.
Scott: Now, if you go down the list here, it makes sense. They all fall within the same groupings that we have within the software. You know, we look at the grains, we have soybeans vs. soybean meal. The relationship there is obvious. Soybeans vs. soybean oil. You'll notice that a couple popular spreads that you've heard referred to a lot, aren't on there. Like the Corn/Wheat spread.
Lan: Because that's not recognized by the exchanges anymore, right?
Scott: Right, that is no longer an exchange recognized spread.
Lan: Why did they pull that off incidentally?
Scott: Basically, you're looking at two commodities that are very differently related. They're both grains, yes, but Corn is a feed grain. Wheat can be a feed grain, but is mainly used for milling into flower. Corn is planted in the Spring. Wheat- at least winter wheat are born in trade wheat is planted in the fall. That's why it's called winter wheat. In the winter. Basically, the corn crop is pollinating when the wheat crop is being harvested. It's not that uncommon when you look at prices to see corn up 2 or 3 cents and Wheat down 2 or 3 cents.
Lan: So, they didn't want to recognize these anymore, because basically of the volatility. Which incidentally means that you don't get the margin break.Scott: Right, that's the only that means is you don't get the margin break. You pay full boat on both sides.
Lan: Then, we have the Live Stock. So, we're looking at Pork Bellies, Lean Hogs, Live Cattle, Lean Hogs.
Scott: Right, all of those make sense. We're either looking at the beginning stages of production to the end stages of production. Like the Live Cattle, or Feeder Cattle. Live Cattle spread, or you're looking at 2 different types, or 2 different areas of a slaughtered animal as in Lean Hogs to Pork Bellies; or you're looking at competing means. Live Cattle Beef vs. Lean Hogs Pork. Live Cattle Beef vs. Pork Bellies or Bacon.
Thin cows, you know, those Feeder Cattle are eventually going to be a burger. Let's put some bacon on that burger! That kind of keeps them all together they're all obviously related. Maybe not terribly closely, but they are related. If we go down to Petroleum. Where does heating oil come from?
Lan: It comes from Crude Oil.
Scott: Yes, it's cracked out of Crude Oil. Where does unleaded come from?
Lan: It comes from the Crude Oil.
Scott: Same place. Obviously then..
Lan: Natural Gas is a bi-product of Crude Oil production.
Scott: Exactly, and obviously then unleaded gasoline is related to heating oil, as well. They both come from the same place. Within the metals markets, we have the Gold Platinum spread. They're both considered precious metals, we have the Gold/Silver spread. Again, precious metals.
Now, if we look into the currencies, the currencies are an interesting group in the spread markets. Really, when you're looking at currency spreads- if we take the Swiss franc for example, okay, and a straight Swiss franc future is how many dollars does it take to buy one Swiss franc. That's the number that we see. If it's trading at 67, it takes 67 cents to buy 1 Swiss franc.
Now, if we do the same thing with the Euro, it's how many dollars does it take to buy 1 Euro. Looking at the relationship of the Swiss franc to the Euro is we're looking at how many dollars to the Swiss franc vs. how many dollars to the Euro or really, how many Euro's to the Swiss franc. Because they both have the same common denominator or U.S. dollar in the futures market. We are looking at a whole different kind of futures contract.
Lan: So, with currency what you're really doing is you're comparing all of the different currencies to what it costs to buy these currencies based on the U.S. dollar index.
Lan: So, they have this common denominator throughout the entire list of currencies.
Scott: Exactly, and you'll see for the cash currency traders, you know, the people that actually trade on the Forex, they don't even get cumbered down with having to go Swiss francs to or dollar Swiss francs vs. dollars to Euros. They just can't get rid of the dollar and just say Swiss francs to Euros. That's what we're doing here, in two transactions instead of in one transaction..
It can be interesting in there, the currency markets are in an area of great expertise personally, for me. Now, we get into another area of just avid spreading is the interest rate markets. We have the 5-Year Note, Silver Bonds. We have the 10-Year Notes Silver Bonds
Lan: In the software we just call those the financials. That's the financials group.
Scott: Right, so we have that 5-Year vs. the 30 Year Bond. We have the 10-Year vs. the 30-Year Bond. That's called the NOB spread. We have the municipal bond.
Lan: Mob Spread, right?
Scott: Yeah, the Mob Spread it's kind of fitting. It's traded on the Chicago Board of Trade. We have the T-bill vs. the Euro Dollar, so we're the Ted Spread. that 5-Year vs. the Bonds, I've heard the referred to as the FOB Spread.
Lan: I think what we should call the S&P NASDAQ, I think we should call that Sapdaq.
Scott: Sapdaq, I think people deserve to have their spreads named too. These spreads are so popular, that they're actually named. You want to buy, hey, I'm long the nob. I'm long 10 Year-Notes, I am short 30 Year Bonds. I'm buying the Ted. I bought T-Bills, I sold Euro Dollars. I'm short the Ted. I bought Euro Dollars, I sold T-Bills.
Lan: I'm long the Mob. It gives you a couple different..
Scott: I wouldn't short the Mob.
Lan, Scott: (Laughing)
Scott: Maybe the Spread..
Why don't we pop into the software here, and take a look at these. I want to start off with kind of the caveat on a lot of these spreads, you get a margin break, and you get a break vs. double margin. But it's not less than single margin in most cases. So, let's just say for example, we're looking here at a Soybeans vs. Soybean Meal spreads. Let's say for example the margin on Soybeans is $1,000.00 initial and the margin on Soybean Meal is $900.00 initial.
We might expect that the margin for this spread it wouldn't be $1,900.00, but it might be around $1,200.00 or $1,400.00. It's more than either the Soybeans or the Meal, but less than the combo between the two. You'll also see these margins are high for their high. Especially compared to when we were looking at the delivery spreads, or even compared to the inter market or the exchange spreads that we've looked at thus far. But the volatility within this type of spread is much greater, as well.
Lan: Well, this is more like trading a straight out futures contract.
Scott: It really is. All the same tools that you use, you can use within this. You see, if you consider that of a.. if you consider that margin is a reflection of risk. You can see that, you know, this spread, these inter-commodity spreads are more.. or could be considered more risky than a straight outright position. I've actually heard it said by many people that spreads give you two chances to lose. Just as well as two chances to win.
You can see on this one this moves, this is a processing spread. There's definitely a relationship between Soybeans and Soybean Meal. Within a processing spread that it wouldn't be as big, but look at some of these moves here.
If we were to go take a look at.. you know, why don't we flip over to the Commodities Tab. Because we're looking at from about March to June, mid June.. beginning of March to mid June, why don't we look at July Soybeans during that period? Let's see how big that dollar move was.
Lan: That's $2,600.00.
Scott: It went from a $2,600.00 move, and if we looked at that Soybean spread, the Soybean vs. Meal spread...
Lan: That same range we looked at probably this range here, $800.00.
Scott: It is a bit less, but you know, it's still we're talking substantial moves here.
Lan: Especially compared to the ones we were looking at earlier.
Lan: When in the long, it gives you the ability to stay in them longer. We were saying because we were less volatile. But these end up being back to almost as volatile as a regular futures contract.
Scott: Exactly, as an outright. You'll also see, a lot of traders will hedge using this type of thing. They don't want to give up their position, going into a report. So, they might spread their position, but they're not willing to give up all the potential. So, let's say I'm long Soybeans going into a crop report, I might look at selling some Meal again, instead. Because I'm not willing to go out and sell another delivery month against it. I don't want to take my position off in case it opens .20 higher, and it's a bullish crop report, like I'm thinking. If beans have been out-producing or out-pacing the Meal, I'll sell the weak sister and buy the strong. Either sell the weakest at this point.
Lan: This could also be an alternative to backing your position with options. Then you don't have the options premium that's decaying away from you.
Scott: Right, you know, this isn't the neatest hedge in the world. But it's a lot of these can especially to a short teem shock offer some time of protection for you.
Now, why don't we pop down and why don't we take a look at maybe let's look at something that really moves here. Let's take a look at the Live Cattle vs. Lean Hogs. This is are we barbecuing beef or are we barbecuing pork? Beef ribs or pork ribs? The markets seem to be favoring there, in the latter part of the year. They're saying, you know, let's throw the beef ribs on the BBQ, and not the pork ribs. The interesting thing here is if we flip over to the commodities part, looking into the latter part, why don't we flip over to a straight commodities chart, here. Maybe a Live Cattle chart. Live Cattle was in a strong uptrend, as well.
The moves are from February. If we take a look at that, it should have already highlighted the size of that move there.
Lan: Right around $2,200.00.
Scott: Now, let's go back and let's look at that move on the spread pages.
Lan: That was our Live Cattle.
Scott: Lean Hogs.
Lan: $5,500.00 or $2,370.00. Depending on where you put your calculator.
Scott: Yeah, there are very equivalent moves. It kind of goes to show you that these markets are, at times, they can be strongly correlated.
Lan: Well, and that's why you have the higher risk, the higher reward, therefore, you have the higher margins.
Scott: Yeah, and you know, I can see if we get rid of a couple of those calculators from the spread, you know, you can see how when it behaves similar to a just an outright chart. I see a definite basing pattern in there from mid-November all the way through mid-January. That kind of, you know, sideways channel. This is almost straight out of Edwards and Magee or other Track 'n Trade videos, you know, you see the upside breakout of the above resistance, you go back, you test the 50% the halfway point of the trading range or the 50% retracement level of that trading range.
Lan: Then, you continue on, you do the same thing. You have another retracement- back to the 50%.
Scott: You know, the same basic tools that we use are extremely applicable to these markets and maybe even more applicable in that not as many people are looking at this and they're traded in two separate pits. Maybe you just don't have the guys playing the games, as such there, that you might see and you do get a chance for some good strong trends.
Why don't we pop down and take a look at a... how about a heating oil Unleaded Gasoline spread? This is an interesting spread, from the vantage point of: when do we use a lot of gas?
Lan: The summer time driving season.
Lan: Except it's the summer time driving season where we start ramping up for our heating oil. That's the wholesale side of it, they start creating the heating oil during the middle of the summer time. That's the use time for the unleaded but it's the wholesale use time for the crude.
Scott: Right, you have to learn to think ahead of exactly what you're saying there, Lan. You have to learn to think ahead of the basic news. It's not our demand that the pump that tends to drive prices up, it's the buying it to fill up the pumps that we can buy it from them.
Lan: But most commodities are based on the wholesale. This is a wholesale market that we're dealing with, this is not much as a retail drive that pushes these numbers around.
Scott: Exactly, we don't, as individuals make much of a difference. It's the big boys that come in and push it around that makes all the difference. They supply us, we're just buying and selling back at hand, after a middle man. But if we look at, if you think about the heating oil, unleaded spread it makes a lot of sense to be kind of a seasonal spread and perhaps, you know, one that you could look at. Regardless of the your thought on the direction of petroleum prices.
From the vantage point of as you're getting ready to approach the summer driving season, what do the gasoline jobbers, the middle men, the distributers, the wholesalers. They have to build their inventory to make sure it's there when we want to go to the pumps and we want to go to grandma's house, or taking the kids on a road trip across the United States to the Grand Canyon and Wolly World.
Lan: It's a real trick, because they're trying to do just in time. So, they have to have the inventory ready to go, but they have to have it just in time, as well. So, they work on a really slim margin in there. You talk about gas stations, and you think, 'Man, we should all go out and buy ourselves a gas station and make tons of money, because they sell thousands of gallons of fuel everyday.' But they don't, these guys go on such slim margins.
You think about a gas station that sells a thousand or two thousand gallons of gas a day, and they're making between 5 and maybe if they're really lucky, they're making 10 cents a gallon, you're talking about a company, a business that's making maybe $100.00-$200.00 a day on they're fuel. They have to operate their entire business, pay employees, pay rent, pay for the overhead, pay their loans off on $100.00 a day, $200.00 a day. You know, I know employees that make that kind of money.
Scott: Yeah, that's a heck of a way to make a living.
Lan: You know, they make more money off of Big Gulp, soda than they do on a tank of gas. Because soda pop as we all know costs about 1 penny or 2. It's more expensive for the paper cup than it is the soda pop. Put a little bit of water and sugar that's in there, they'll make more money off of their soda pop. They're trying to draw you in, so you will buy their soda pop.
We're talking about a "just in time" service when we're talking on a wholesale level. Which you know, is billions of gallons of fuel working on slim margins.
Scott: Yeah, and if we're going to see a shock to this, it's extremely stressed and wound up system. If we're going to see a shock at this time of building supply. We're going to see the shock on the unleaded side. If something happens, we're going to see it in Unleaded.While if something happens in the heat of summer exactly like Lan said, it's when we're all out driving and consuming gasoline. That's when...
Lan: These guys are starting to ramp up their heating fuel.
Scott: Right, you know, looking at that, it's at that point that a stop within something a monkey wrench is thrown in. It's going to be felt more by heating oil, than unleaded. It doesn't matter the general direction of petroleum prices, you're betting on the...
Lan: The difference between the price of the two underlying contracts.
Scott: Exactly, so if we look at this one, we actually displayed it as a Heating Oil, vs. Unleaded or long heating oil short unleaded. So, it going down means that the unleaded is gaining relative to the heating oil. Then, as we start to think about.. wow, summer driving season, and if we said it's the wholesale demand that drives it, you know, this is just another classic example seeing that bottom in there of buy the rumor, sell the fact.
By the time everybody knows the news, it's not news. I think that's a very easy, that's kind of, to me one of the real classic inter-market spreads is the heating oil unleaded spread. Another classic inter-market spread to me is: Take a look at the Gold Platinum spread. Typically, when you look at the Gold/Platinum Spread if we're going to say buy Platinum, we want Platinum/Gold.
Lan: Which one do you want to pull up here, are you talking about the..
Scott: Right, I actually want to pull up the way we trade it would be at equal dollar. So, buying two platinum and selling one gold. We look at buying 2 platinum and selling 1 Gold because the platinum contract calls for 50 troy ounces. While the Gold contract calls for delivery of 100 troy ounces.
Lan: So, that's why we do the buy 2 Platinums and sell 1 Gold to try and equal out the quantity sizes, there.
Scott: Exactly, now we have to look at this as an equity chart basis. Again, if you remember back from when we calculated spreads and Track 'n Trade software does this for us automatically. We're taking the total dollar amount controlled by 2 platinum contracts and subtracting the total dollar amount from 1 Gold contract.
Really quick in here, I just want to kind of say I think it's 50x more gold is produced every year than platinum. Or platinum is 50x more rare than Gold. Platinum is also used in catalytic converters. Auto industries are huge, the single largest consumer of platinum. Now, another thing is platinum also is the bulk of production comes out of the Ural mountain region in Russia or the former Soviet Union. We have a lot of political instability there. There's a lot of risk. Platinum is also becoming a more and more thin, thin market.
This used to be an extremely popular spread that markets and very big markets were made in the spread both and 1 platinum to 1 gold and 2 platinums to 1 gold. You used to be able to trade the spread and you could almost day trade this spread. It had height it offers. Lots of guys made the market in this spread. That has fallen off, but if we go back and we're going to take a quick look at a history lesson here. Kind of keying in on the fact that platinum was 50x more rare than gold. Which you think you should sell at a higher price?
Lan: You would think that obviously platinum would.
Scott: Let's look at this spread really quick on a 1 to 1 basis. As we're looking at it on 1 to 1 basis, you'll notice in the- let's go down and look at that bottom down there. You'll notice down in the bottom part of Gecko where we see the last of where our cursor is and we see the date, look at that spread. That's just the straight difference, not the equity difference, but the straight difference.
Lan: That's a point difference.
Scott: Yes, that's saying that platinum is trading $1.70 per troy ounce over the price of the Gold.
Lan: At 36.30.
Scott: Right. Now, if we scroll right around that bottom, remember it's 50x more rare. So, let's scoot that chart back a little bit in time. Keep going back, where is that spread, I need to scoot that back as far as I can go. Okay, let's move our cursor around so we can see the spread values. We want to go all the way, see that lowest low back there in March? What was that spread trading at?
Lan: 6.80 - 36.30.
Scott: 6.80, I mean $6.80 over, 50x more rare. We can even go back when both of these contracts. Now, if we go forward in time when these contracts are liquid.. typically, it's really common to see Gold or Platinum trading somewhere in the ball park of a $50.00-$100.00 premium.
Lan: You're getting closer, right in this area. There's a 25.30-36.00. There's a 33.00-36.00 at a 1 to 1 ratio.
Scott: Yeah, you know, really, what you're looking at here is you're looking at these two markets that have normally traded at- you know, it's 50x more rare, and yet we see them trading at the same price. Whether you're bullish platinum or not. If we go and look at, during that same period, why don't we pull up the April platinum, just the straight April 1997 platinum chart?
Let's look at that same period, so we see them starting to trade around the same price, or really close. We'll look at the beginning of January, okay? If you started to put this on because there's a strong seasonal tendency for platinum to gain in value relative to gold at the beginning of the year. This makes sense. What is platinum used for? We went over this. It's catalytic converters, right? Single largest user. Who's the single largest user of Gold worldwide? The jewelry industry. When do the bulk of jewelry sells happen?
Lan: It's prior to Christmas.
Scott: What happens after Christmas?
Lan: Crash! Down it goes.
Scott: Yes! I used to have an uncle that owned a jewelry store. He said that he made about 60% of his sales for the year, during the Christmas shopping season. He said, what I would do, if I would buy all of my inventory going into that and I can't afford to underbuy going into that Christmas shopping season, Because that customer is going to walk into my store once a year, and if I don't have what they're looking for they're going to go to my competitor, and I might not get them to walk back in next year, either. I have one shot to make that sale. I better have what they're looking for. You see, a lot of jewelry stores operate that way.
There's this big rush of demand to fill and put stuff in the store for Christmas, so you have a big demand for Gold. Then, after Christmas, that demand just disappears.
Lan: This is just for a fun sideline. There's a group out in lobby in congress, to try to get congress to stop the mining production of Gold. Not that I think it'll every happen, but they want to stop it because they say that we're using all kinds of chemicals that leach into the ground and destroy the ozone and the nature/natural part of the country and extracting Gold. When they say that the majority of the Gold storages are just sitting in the warehouses doing nothing.
Scott: I don't know about the majority, but there is an awful lot of Gold in storage.
Lan: That just sits around.
Scott: Yeah, and Gold is very rarely consumed. The same Gold that Caesar mined is still around today. It's not like wheat, you don't eat gold.
We're looking at not only do we see a time of the year that this spread- where platinum goes up and platinum tends to go up because it's used in catalytic converters and the automobile industry is starting to gear up now, at the beginning of the year for the new model year. So, they're buying the platinum, get the platinum to make the catalytic converters, to put it in the new cars in about 6-7 months, from then. So, platinum has demand, and then you're looking at, right after the Christmas season when gold demand has gone to heck in a hand-basket. You don't even have to be terribly bullish to platinum, to see. Then you see this metal that's 50x more rare than gold trading at the same price; a $6.00 difference between them. That's a give me.
Had you thought to just trade platinum, we look at the beginning of the year, there, you know, right here in January. Let's look at the beginning of that year, right in there. It fell all the way through in February. Before that automobile demand kicked in. Are you going to, or maybe you looked at those early January lows and you thought they hold. No, they broke. Oh, that next low, that low, that's going to hold. Oh, don't, no, that one broke too, I'm stopped out. I missed that whole move. Because I got stopped out. My whole theory was wrong.
Maybe you want to short Gold, you know, through that, but I'll give you a little hint. Gold went up too, when platinum did, it just didn't go up as fast. But if we go and we look at that Gold Platinum spread or the Platinum Gold spread, the 2 / 1, we buy it in the beginning of January.
Lan: It looks like we hit, right there, head on.
Scott: Yeah, we never took any heat. That spread just went straight up. Now, we did see some decent corrections. We saw a little one...
Lan: Not for a month and a half later.
Scott: Yeah, we saw that little one in the second half, yeah. In January it went a little sideways. How big is that?
Lan: Hmm.. not something you wouldn't have held through $400.00, I think you would've held through that.
Scott: Yeah, $400.00.. I could sit through $400.00.
Lan: Not much more than that, though. I think on a technical basis, you would probably want to hop out if it would've caught much more.
Scott: Yeah, I was going to say I didn't even- at that number 1 point. What's the date on that number 1 point?
Lan: December 16th.
Scott: December 16th, let's look at the 1 to 1 chart for December 16th and see our new 1 year lows - what does that spread say? The lower number under the spread, we have the equity as .10. That's 50x more rare and it's trading 10 cents over. Then, if we go back to the 2 / 1, then we had the 123 bottom. Maybe if you didn't believe, you know, you don't buy okay, Scott I'm buying this whole thing on catalytic converters vs. jewelry demand. You know, I don't like 123's, and 50 to 1 more rare, I'm not buying. But we put them all in there, and even if you miss all of that, you see the consolidation period and second half of February and then the breakout up.
Somewhere in there, if you're paying attention, this was a gimme. I think we beat that one to death, but every once in awhile, you see opportunities that only exist in the spread markets, that you just don't see in the outrights.
Let's take a look at, let's take a look at the NOB spread. Those silver bonds. That's the 10 year T-Notes vs. the 30 year T-Bonds. This is commonly considered a proxy spread, this is a very, very heavily traded spread, as well. On the Chicago Board of Trade. There are guys that stand around and just make knob markets. Do you want to kind of preface this with the fact that currently the U.S. Treasury has stopped issuing 30 Year Bonds. This is one that may eventually go away, as the demand for, or as the supply for long bonds disappears, and we're moving to a 10 year bench mark.
But the principals still remain the same, and we might be looking at 5-year notes, vs. 10-year notes, or Fon's spreads. I don't know what we'll call them. Maybe we're going to look at 2-year notes, vs. 10-year notes, and we'll call them Ton's spreads. I'm sure the boys will come up with a cute name for it. Not as good as Spaznaq, or Sapdaq.
This spread moves, look at these dollar differences in here. This spread will move. This is also an extremely volatile period for interest rates. If we go, and we can take a look at either a 30 year or a 10 year, why don't we look at just a straight Futures chart? Look at some of those moves in there. These are several point moves, that are appearing in here. $11,000.00 move, a $12,000.00 move, almost a $13,000.00 move.
Lan: That's $9,000.00, right there.
Scott: You know, bonds move. Nice stay, you know, when you tend to think of bonds you to tend to think of widows and orphans, this is the investment for widows and orphans.
Lan: We're looking at a margin of close to $3,000.00 initial margin.
Scott: Yes, there are also- you could trade this, you could trade the bond or the NOB spread on the mid-am. Which is half size contracts, and that still moves enough to interest everybody, every one tic the minimum move. It's just about $16.00 and it's not uncommon to see full point moves, with $500.00 in a day. See a point and a half, $750.00 and that's on a half size contract. That's the mini contracts moving $750.00 in a day.
If we go back, you know, we're looking at $12,000.00 moves, $9,000.00 moves, $11,000.00, so now if we go back and we look at the spreads, we look at that NOB spread, and we see our $3,500.00 and our $4,200.00 moves...
Lan: They're not so big.
Scott: It kind of puts it into perspective. The underlying markets are volatile, the underlying markets are volatile, the spread is going to be volatile.
Lan: Right, big movers under the underlying commodities are big movers, so are the spreads.
Scott: Right, typically a rule of thumb is the knob spread moves between 25%-35% of the movement of the bonds. You're basically able to get rid of somewhere between, you know, 65%-75% of the volatility in it. Which still, that leaves you with a lot of volatility. This is a big, a big moving one.
We could also take a look at, you know, let's look at your Sapdaq. Lan, let's take a look at your S&P 500 vs. the Nasdaq 100 or large caps vs. small caps. This is your favorite Sapdaq spread. This is one that is, you know obviously extremely volatile.
Lan: And very expensive.
Scott: Yeah, and very, very expensive. You know, you're looking at a margin rate of $25,000.00 on the S&P and $18,000.00 on the Nasdaq Futures, so we add those up. We come up with what? Say, maybe we get a half. We're still at $25,000.00 spread that we're putting on. If you look at the dollar volume, look at the size of those moves, you know, it doesn't look that treacherous, but that move was what $17,000.00? That kind of drop and end of year where everybody is out shopping for cheap values.
Lan: There's a $10,000.00 move there. You're the only one I know that can trade this, Scott.
Scott: Yeah, I still say you have a good career as a stand up comic, Lan. If we, you know, we have to put this spread into perspective. We're seeing a $10,000.00 move or an $11,000.00 and an $18,000.00 move- why don't we go look at the straight S&P futures?
Now, there are E-minis on both of these, as well. But we look at a straight S&P future. We're seeing, yeah, let's look in there, what's that last move in that same period.
Lan: Let's get a larger font, here. That's a $37,000.00 move.
Lan: A $27,000.00 move.
Scott: Yeah, and that kind of puts our spread into perspective. $18,000.00 move into perspective. Why don't we take a look into the key really quick, for the S&P? I want to say there's about $25,000.00 margin.
Lan: $25,500.00 initial margin; $20,000.00 maintenance.
Scott: So, that kind of gives us the ballpark of maybe we say the spread is probably going to cost us pretty close to that. A little more, maybe. Because it is possible. I can remember several times where the S&P, you know, your big cap stocks would be up sharply, and you would see the Nasdaq get pummeled during that whole .com blow up.
Lan: You know, most people day trade the S&P and the Nasdaq because of their liquidity. Going with a futures, if you're into day trading, and you're day trading the S&P, you might want to consider holding a longer term trade with a spread.
Scott: Exactly, you know, if we look at the- let's take a look at a E-mini. Just a straight E-Mini.
Lan: That's not so bad, $5,300.00 move right there. What does the key say, right there? The key says initial margin, we're at $3,000.00.
Scott: $3,000.00 there vs. let's say 1.6, so we're at $30,000.00, so $3,000.00, $5,000.00, we're looking at maybe a $6,000.00 margin for the spread or something along those lines. Just kind of winging it. That's not unheard of. If you're out there position trading in the stock market and trying to bet on relative performance on large cap vs. small cap stocks, that's the reasonable amount.
Speaking of stocks with the single stock futures, a lot of spread trading opportunities are going to be available there, as well. It has always been referred to within equity circles as pears trading. That would be along the lines of looking at companies within the same industry group. For example: Because I'm sitting here in a software company, we'll talk about computer companies. Who makes a better, who makes a better machine, Dell or Gateway? They both basically have the same business model. They're both going to make money when computer sales are well, and the economy is strong. When the economy is weak, or we don't have a hot computer that we all have to have. They are both going to not make any money. I want to say, suck gas, or suck eggs, or whatever the term is.
Lan: Not make money.
Scott: Not make money. (Laughing) But you can bet on one of them is a better company than the other. So instead of saying well, let's just.. since I happen to have a Dell on my desk, I think Dell is a better product than Gateway. Therefore, if we turn around and we see strong computer sells and the whole nine yards, then I think Dell will outperform Gateway, they will make money.
Lan: So, if you were going to do a spread on those two, you would want to buy Dell and sell Gateway.
Scott: Right, and I'm not making the- again, I'm not making the bet that computer sells are going to be strong, I'm making the bet that I think Dell is a better company than Gateway.
Lan: And they'll outperform Gateway.
Scott: Dell will outperform Gateway. So, if they both go down Dell will go down less. If they both go up, Dell will go up more. It's really taking that large caps to small caps. Dell to Gateway, it's the same concept as Pork to Beef.