Spread Trading - Strategy & Calculation -
Commodities
There are two types of strategies for Spread: Bull
Spread & Bear Spread
Bull Spread
This strategy is applied when the spread gap
between the two contracts (Gold Far month
contract – Gold Near month contract or Lead Oct
contract – Zinc Oct contract) is more or widen.
Bear Spread
This strategy is applied when the spread gap
between the two contracts (Gold Far month
contract – Gold Near month contract or Lead Oct
contract – Zinc Oct contract) is less or narrow
(gap between the two contract become “Zero” or
“negative” figs.)
Calculation:
Here, I’m taking the example of spread between
the Lead & Zinc (my favourite one):
First take the historical data for last one month
from MCX website (mcxindia.com – Market Data
– Bhav Copy – Bhav Copy Commoditywise)
Then take the spread gap between the closing
price of each day (Spread Gap = Lead Closing
Price – Zinc Closing Price) for last one month
Take the "Average" of those spread gap of the
closing prices and also the "standard Deviation"
of those spread gap of the closing prices for last
20-25 days.
Now we will have two figs. That is “Average” &
“Standard Deviation” .
Now comes the final part that is the decision
making and implementation of Spread strategy:
Bull Spread Range = Average + Standard Deviation
If the spread Gap > Bull Spread Range, then we
will go for Bull spread strategy. It means we will
Sell the far month contract or Lead contract and
Buy the near month contract or Zinc contract.
Bear Spread Range = Average - Standard
Deviation
If the spread Gap < Bear Spread Range, then we
will go for Bear spread strategy. It means we will
Buy the far month contract or Lead contract and
Sell the near month contract or Zinc contract.
Important point:
I have attached an Excel file: Spread Analysis –
Lead & Zinc for your reference to understand the
calculations.
For calculating the spread gap between the two
contracts, I always subtract from Far month to
near month contract for spread calculation. If you
will change this calculation scenario then your
strategy will also change.
For lead & zinc spread, I found that there Bull &
Bear spread gap is around Rs. 2.5 to 0 even to
-0.5. Any time if you find a spread gap of Rs. 4 to
5 or Rs. -2 to -3 will be a very good opportunity
for spread in Lead & Zinc.
For Gold, Bull & Bear spread gap is around Rs.
140 to 80/70.
Same way you can find the spread gap for other
commodities also. Continues study and watch will
help you to understand the spread gaps for
different commodities.
If anyone can have it live for intraday then it will
be a very good opportunity .
Commodities
There are two types of strategies for Spread: Bull
Spread & Bear Spread
Bull Spread
This strategy is applied when the spread gap
between the two contracts (Gold Far month
contract – Gold Near month contract or Lead Oct
contract – Zinc Oct contract) is more or widen.
Bear Spread
This strategy is applied when the spread gap
between the two contracts (Gold Far month
contract – Gold Near month contract or Lead Oct
contract – Zinc Oct contract) is less or narrow
(gap between the two contract become “Zero” or
“negative” figs.)
Calculation:
Here, I’m taking the example of spread between
the Lead & Zinc (my favourite one):
First take the historical data for last one month
from MCX website (mcxindia.com – Market Data
– Bhav Copy – Bhav Copy Commoditywise)
Then take the spread gap between the closing
price of each day (Spread Gap = Lead Closing
Price – Zinc Closing Price) for last one month
Take the "Average" of those spread gap of the
closing prices and also the "standard Deviation"
of those spread gap of the closing prices for last
20-25 days.
Now we will have two figs. That is “Average” &
“Standard Deviation” .
Now comes the final part that is the decision
making and implementation of Spread strategy:
Bull Spread Range = Average + Standard Deviation
If the spread Gap > Bull Spread Range, then we
will go for Bull spread strategy. It means we will
Sell the far month contract or Lead contract and
Buy the near month contract or Zinc contract.
Bear Spread Range = Average - Standard
Deviation
If the spread Gap < Bear Spread Range, then we
will go for Bear spread strategy. It means we will
Buy the far month contract or Lead contract and
Sell the near month contract or Zinc contract.
Important point:
I have attached an Excel file: Spread Analysis –
Lead & Zinc for your reference to understand the
calculations.
For calculating the spread gap between the two
contracts, I always subtract from Far month to
near month contract for spread calculation. If you
will change this calculation scenario then your
strategy will also change.
For lead & zinc spread, I found that there Bull &
Bear spread gap is around Rs. 2.5 to 0 even to
-0.5. Any time if you find a spread gap of Rs. 4 to
5 or Rs. -2 to -3 will be a very good opportunity
for spread in Lead & Zinc.
For Gold, Bull & Bear spread gap is around Rs.
140 to 80/70.
Same way you can find the spread gap for other
commodities also. Continues study and watch will
help you to understand the spread gaps for
different commodities.
If anyone can have it live for intraday then it will
be a very good opportunity .