For now I've just looked at calendar oil spreads. But after digging myself into Keith Scharp's book "The complete Guide to spread trading" I tried an intermarket spread yesterday:
- You look at the market and decide which one is strong and which one is weak.
- Right now the Technical's are relatively strong, while the big caps, especially the Financials are weak
- Meaning: If it goes up you can expect the NQ to outperform the other markets, if it goes down the YM will be the heaviest hit
- Trading an intermarket spread means: You go long one market and short another at the same time
- But first you need to understand, that trading 1 NQ is not the same as trading 1 YM contract. They don’t move at the same speed
- Therefore you do a little calculation:
NQ at 1080 * 20$ (per point) is worth 21600$
YM at 6625 * 5$ (per point) is worth 33125$
To make them move at the same speed, your long and short positions need to have approximately the same value
NQ: 3*21600$ = 64800$
YM: 2*33125$ = 66250$
- So your Spreadtrade would look like: Long 3 NQ and Short 2 YM contracts
Most brokers will recognize that this is a Spreadtrade and give you a very low commission on the whole trade. In case of IB yesterday this trade cost me about 6500$ margin (IB gives the margin advantage for the corresponding 2 long and 2 short positions and adds to that the 1 contract long NQ margin)
- This trade will show you a profit in rising and in falling markets as long as your assumption that Technical's will outperform the big cap Dow stocks is correct. It will show you a loss, if there is a snap back rally in the financial sector.
In spreads you need to be right about the fundamentals not about the direction of the market.