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Spread
Scan Issue: November 06, 2006 - Volume 117
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Joe Ross Spread Trading Newsletter.Each week we present spread trading examples and opportunities in order to help you become a more professional spread trader.
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Today we consider an inter-market interest rates spread: long March 07 30-Year T-Bonds and short March 07 10-Year T-Notes (USH7 – TYH7). We see on the chart above the spread has been following its seasonal pattern so far, and now gives us a Ross Hook for a possible entry. The optimized statistical entry is 11/03, the exit 12/12. The aggressive trader might think about entering the spread when it starts to move up again. Please note – neither March 07 market shows enough volume yet. I suggest entering the December 06 contracts and roll into March 07 later if necessary.
Seasonal background: Market-driven interest rates have tended to firm slightly during October, the first month of a new U.S. fiscal year, and then to ease through at least the remainder of the calendar year. When rates trend, the long end of the yield curve normally leads - perhaps because change is magnified through time. Thus, the market has tended to "go short the March NOB," usually anticipating long bonds to rise faster than 10-year Treasuries.
Traders may want to enter the spread a value of 4^21. Margin for the spread is $729 (reduced margin). Suggested risk is $625. Initial projected objective is $625, then a move to 6^0 or higher.
On October 23 we told subscribers of our daily newsletter, Traders Notebook, "Consider entering an intra-market wheat spread WZ7 – WH7 MOC on Monday. Margin for the spread is $1,350 (reduced margin). Suggested risk is $1,000. Initial projected objective is $1,000, then a move to break even or higher. Basis is seasonal (app. 10/25 – 02/30) and a RH. Comment: Wheat is moving up like crazy. I personally would try to get into the trade at least with 2 lots. I would get rid of the first lot pretty quick, and would leave the second for a long term trade."
Here's how we suggested managing this trade:
10/23 In?
10/30 Spread is having a hard time. It just doesn’t want to move up. I personally would exit if the spread doesn’t move up to my first target by Friday.
10/31 Spread is close to the first suggested target. Suggest moving the stop to –54^4.
11/01 Suggest taking some money from the table if not already done.
11/03 Spread hit first suggested target.Open equity on remaining contracts: $1,000 per contract. Please keep in mind that we already realized profits of about $1,000.
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Student's Question: "Andy, after giving some spread seminars together with Joe, what do you think is the most difficult part for your seminar attendees to understand?"
Andy: Spread trading is a bit different from straight futures trading in many points. It is a more “pure” form of trading. But the most difficult part to understand at the seminars is when we talk about “how to enter and exit a spread trade.” It is difficult for most new spread traders to understand that it doesn’t matter if you enter or exit Market On Close (MOC) today or tomorrow. Of course you will have a different result for each trade, but in the long run it will even out. It is the general idea that counts in spread trading, and the ability to follow your trading plan consistently.
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Disclaimer:
The Commodity Futures Trading Commission has asked us to advise you that trading spreads is complex and carries a high degree of risk. While there is opportunity for incredible wealth building, there is also the risk of losing even more than you invested. Of course, that's not unlike most other businesses. But informed traders are the best traders!