Why Spreads?

The rationale behind spread trading is one of the best-kept secrets of the insiders of the futures markets. While spreading is commonly done by the market "insiders," much effort is made to conceal this technique and all of its benefits from "outsiders," you and me. After all, why would the insiders want to give away their edge? By keeping us from knowing about spreading, they retain a distinct advantage.Spreading is one of the most conservative forms of trading. It is much safer than the trading of outright (naked) futures contracts. Let’s take a quick look at some of the benefits of using spreads:* Intramarket, and some Intermarket, spreads require considerably less margin, typically around 25% - 75% of the margin needed for outright futures positions.* Intramarket, and some Intermarket, spreads offer a far greater return on investment than is possible with outright futures positions. Why? Because you are posting less margin for the same amount of possible return.* Spreads, in general, trend more often than do outright futures.* Spreads often trend when outright futures are flat.* Spreads can be filtered by virtue of seasonality, backwardation, and carrying charge differentials, in addition to any other filters you might be using in your trading.* Spreads can be used to create partial futures positions. In fact, virtually anything that can be done with options on futures can be accomplished via spread trading.* Spreads allow you to take less risk than is available with outright futures positions. The amount of risk between two Intramarket futures positions is usually less than the risk in an outright futures position. The risk between owning the underlying and holding a futures contract involves the least risk of all. Spreads make it possible to hedge any position you might have in the market. Whether you are hedging between physical ownership and futures, or between two futures positions, the risk is lower than that of outright futures. In that sense, every spread is a hedge.* Spread order entry enables you to enter or exit a trade using an actual spread order, or by independently entering each side of the spread (legging in/out).* Spreads are one of the few ways to obtain decent fills by legging in/out during the market Closing.* Live data is not needed for spread trading, saving you $$ in exchange fees.* You will not be the victim of stop running when using Intramarket spreads. What Can You Expect?Here is an example of what you can expect from Intramarket spread trading. We think you may be pleasantly surprised!!This spread was entered not only on the basis of seasonality, but also by virtue of the formation known as a Ross hook (Rh). The spread moved from -69.0 to -7.5 = $3,075 per contract. The margin required to put on this spread was only $608, thus the return on margin is more than 500%.Here is an example of an Intermarket spread. Look at the the following chart: Would you want to have been long live cattle from December until February?But, what about a spread between Live Cattle and Feeder Cattle?The spread moved from -10,200 to -7,200 = $3,000 per contract. The margin required to put on this spread was only $540. The return on margin is more than 550%.Lastly, we show you another intermarket spread. This one was made between Euro and British Pound. Although you might have made money on a Euro trade, you would have suffered from serious whipsaw during the entire length of the trade.