Friday, March 06, 2009

Intermarket Spread

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:

  1. You look at the market and decide which one is strong and which one is weak.
  2. Right now the Technical's are relatively strong, while the big caps, especially the Financials are weak
  3. 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
  4. Trading an intermarket spread means: You go long one market and short another at the same time
  5. 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
  6. 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$
  7. 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)
  8. 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.