Investing In Stock The disadvantages of spread trading in SSFs are these: • It is difficult for many traders to understand spreads. • Intermarket spreads in SSFs can be very risky and volatile. • You have to monitor the behavior of a spread itself as opposed • You must exercise caution in placing spread orders. All too How Spreads Can Make or Lose Money Remember that spreads can make or lose money in a number of ways. Consider the following possibilities and their outcome. Your position: You are long General Motors (GM) futures at $33 and short FORD (F) futures at $25. The spread between the two when you entered was $8 in favor of (stated as "premium to") GM. In other words, GM was priced $8 higher than F when you entered. How you make or lose money on this spread: As long as the spread between GM and F increases (i.e., moves in the positive direction), you make money. Therefore, if the spread moves from $8, your entry price, to $12, you have made $4, or $400 in real money as you have 100 shares of the spread. If the spread becomes less positive by moving down from $8 to $3, you are losing money. In this case, you lost $5, or $500 in real money. Note, of course, that your loss is a paper loss (open loss) until you exit the spread. Internal working of the spread: Continuing with the GM versus F example, note the following "internal" functioning of the spread and the outcomes. 1. Long GM $33, Short F $25: Spread = $8 on entry GM declines to $30. Your loss = $3 F declines to $17. Your profit = $8 You made $8 and lost $3: Net gain = $5 Long GM $33, Short F $25: Spread = $8 on entry F goes up to $30. Your loss = $5 You made $22 and lost $5: Net gain = $17 3. Long GM $33, Short F $25: Spread = $8 on entry F goes up to $30. Your loss = $5 You lost on both sides of the spread. Net loss = $8 4. Long GM $33, Short F $25: Spread = $8 on entry F goes down to $20. Your profit = $5 You made money on both sides of the spread: Net gain = $12 stock market ~ stocks |