Generally, spread is the difference of two or more (it’s called basket then) financial instruments. Each instrument is generally taken into calculation multiplied by a weight coefficient. If a negative weight is used, the instrument will be sold when buying the spread and the other way round.
Most traders say that markets nowadays have changed, become more volatile and chaotic. They are definitely harder to trade than 5 or 10 years ago. Classical trading, which worked a couple of years ago, now doesn’t. So most traders are in search of “the magical tool” to predict the markets, often using complicated mathematic formulas or even astrology. People are in search of a robust strategy, which will produce stable profit despite all the market changes. One of this strategies is spread trading.
One important thing when trading the basket is the correct choice of instruments. Often highly correlated instruments are used, for example stocks of companies which operate in the same inductry, futures with different expiry times, currencies which depend on each other. This hint gives the opportunity to achieve a market-neutral position, where trader profits from divergence and convergence of instruments’ prices.
Different types of spread trading are arbitrage trading and pair trading.
Arbitrage trading is based on trading the same instrument or similar ones. Depending on the tools used, arbitrage trading can be divided into several types:
– spatial arbitrage assumes the same instrument, traded on different exchanges, is used;
– equivalent arbitrage is using an instrument traded on different markets, for example stock – futures on this stock, or stock – ADR;
– Calendar arbitrage, where futures with different expiry dates are traded.
Most traders say that markets nowadays have changed, become more volatile and chaotic. They are definitely harder to trade than 5 or 10 years ago. Classical trading, which worked a couple of years ago, now doesn’t. So most traders are in search of “the magical tool” to predict the markets, often using complicated mathematic formulas or even astrology. People are in search of a robust strategy, which will produce stable profit despite all the market changes. One of this strategies is spread trading.
One important thing when trading the basket is the correct choice of instruments. Often highly correlated instruments are used, for example stocks of companies which operate in the same inductry, futures with different expiry times, currencies which depend on each other. This hint gives the opportunity to achieve a market-neutral position, where trader profits from divergence and convergence of instruments’ prices.
Different types of spread trading are arbitrage trading and pair trading.
Arbitrage trading is based on trading the same instrument or similar ones. Depending on the tools used, arbitrage trading can be divided into several types:
– spatial arbitrage assumes the same instrument, traded on different exchanges, is used;
– equivalent arbitrage is using an instrument traded on different markets, for example stock – futures on this stock, or stock – ADR;
– Calendar arbitrage, where futures with different expiry dates are traded.
