Financial spreads can be good. But don't bet the ranch.
It is only now that spread trading has been gaining some traction. In spite of commodities having turned popular at the beginning of last decade due to in part investors such as Jim Rogers making a big push for them, most traditional traders are only now starting to get their feet wet looking for some spread betting advice that may include a roadmap in terms of strategies and scope.
So what is spread trading? It is the simultaneous purchase of one commodity futures contract and the sale of a different contract. The contracts can be different delivery months in the same commodity, they can be two different commodities that are related, they can be the same commodity traded in two different locations. A simple understanding of spreads points to an arbitrage situation that can be exploited by the savvy trader or the experienced one who has lived through a variety of markets, and survived, and is familiar with the many twists and turns.
Financial spread betting has always been an essential component of the futures marketplace, most of the time, reserved to the more sophisticated group. Among them there are the large commercial spreaders, savvy speculators, grain companies and the like that use spreads to roll over contracts from month to month hoping that their strategies will lead to enough profits to counterbalance the cost of storing and carrying inventory. As said, the vast majority of financial spread trading is done by large speculators and/or specialized commercial firms. However, slowly but surely these very interesting trading strategies that show the promise of great rewards have started to percolate into the retail segment.
Taking into account that potential investors have to analyze two positions as opposed to one, it is understandable that spread betting companies aren’t rushing to sign up clients. For the retail user there are several challenges that have to be dealt with before spreads take a more popular stance. Spreads analysis is based on fundamentals. In particular, the bettor must carefully assess the relative supply and demand of the vehicles to be traded. Not a small problem, considering that part of this analysis should include also future estimations. Important factors to consider are exports trends, weather, planting crops, geopolitical environment, currency fluctuations, demographics and energy just to name a few. Remember, it is about assessing correctly the present and predicting with some degree of accuracy the future. So good sources of information as well as a multitude of them become essential.
But even though it may look like a daunting task for fundamentalists, when trading spreads correctly, there may be no other trading market where the smaller fish could profit as handsomely, for as an extended period of time and with a lesser amount of risk than say, stock trading. Concisely, futures spreads can do wonders to minimize the volatility and risks involved in futures trading.
So… back to square one, how do we profit from spread betting? Simply by trying to profit on the CHANGE in the difference in price between two contracts. The trader operates in two legs: being long one contract and simultaneously short another one in regards to:
- Time (different months)
- Location (different exchanges)
- Commodity (corn vs wheat / australian dollars vs. euros).
The focus being on the relative value of the contracts as opposed to their absolute price. In essence, one must look at the percentage of change by which the spreads either widen or narrow in relation to the original position.
That is where the profit or loss lies.
My advice, get some books, read some tutorials, ask questions at the spread betting forum, look for futures seminars and educate yourself as much as possible for there could be wonderful money making opportunities coming your way.
