Spread Trading - Strategy & Calculation

[iGuru]

hi,
To find correlation between two commodities how many days data we need to find . Can you give us the other correlated commodities like silver and gold , copper and aluminium ect .Is there any tools to find the correlation.

regards
bala

Hi Bala,

Take minimum 20-25 days of data.

Don't go blindly for the correlation.......... it need to be from same asset class, there fundamental need to be some around same (it will be very difficult to explain, but anyone can gain knowledge by tracking it on daily basis.), there lot size need to be same, as it will be always adivceable to go for commodities with same lot size or else you need to adjust the lot size.......... Like if you do Spread between Silver & Silver Mini, then for every one lot of Silver (Lot size is 30 Kgs) you need to take 6 lots of Silver Mini (Lot size is 5 Kgs.......... 6 Lots x 5 Kgs = 30 Kgs).

Even Aluminium, Lead & Zinc comes in the same asset class.......... it will be very difficult to go for Spread between Lead & Aluminium or Zinc & Aluminium.
(same for some other commodities)

So, I will always advice you do backtesting of the data before going for Spread with any commodities or cross commodities.

In my previous post here, I have mention in general how to calculate the correlation in excel. Please check it out.

 

[vssoma]

is it possible.....??????

dear,
is it possible to plot both contracts( spreads ) in one chart in amibroker. or at least the difference of the price of the two contracts in ami.

 

[iGuru]

is it possible.....??????

Hi,

I never used Amibroker so I can't say about it.

But in Tickerplant (Technical Analysis & market news Software by Tickerplant India - FT Technologies) you can do it. There is an option for Spread charts in the software where you can see the live change in spread gap to take your spread strategy decision.Even you can upload the live data in excel sheet.

 

[balaj78]

Hi Bala,

Take minimum 20-25 days of data.

Don't go blindly for the correlation.......... it need to be from same asset class, there fundamental need to be some around same (it will be very difficult to explain, but anyone can gain knowledge by tracking it on daily basis.), there lot size need to be same, as it will be always adivceable to go for commodities with same lot size or else you need to adjust the lot size.......... Like if you do Spread between Silver & Silver Mini, then for every one lot of Silver (Lot size is 30 Kgs) you need to take 6 lots of Silver Mini (Lot size is 5 Kgs.......... 6 Lots x 5 Kgs = 30 Kgs).

Even Aluminium, Lead & Zinc comes in the same asset class.......... it will be very difficult to go for Spread between Lead & Aluminium or Zinc & Aluminium.
(same for some other commodities)

So, I will always advice you do backtesting of the data before going for Spread with any commodities or cross commodities.

In my previous post here, I have mention in general how to calculate the correlation in excel. Please check it out.

reply

hi,
Thanku for ur prompt reply .I have an dout ,this came from the begining of the trading .
For eg

The closing price on 14th Sep 2010 for Gold future Dec contract @ Rs. 19284 and Oct contract @ Rs. 19195. Spread difference between these two contract is Rs. 89 and so my Spread strategy would be that, I would have buy Gold Dec contact @ Rs. 19284 and have sold Oct contract @ Rs. 19195. On 25th Sep 2010, the closing price for Gold future Dec contract @ Rs. 19281 and Oct contract @ Rs. 19135. So on this day I would have squared off my position by selling Gold Dec contract @ Rs. 19281 & Oct contract @ Rs. 19135. So Spread difference between these two contract is Rs. 146 and my gross gain/loss from this spread trade is Rs. 57 per lot. (i.e. Rs. 57 x 100 = Rs. 5,700 per lot). My net return, assuming brokerage @ 0.01%, will be Rs. (57-14) x 100 = Rs. 4300 per lot which is nearly 10% of the spread margin for Gold.

Here u are selling the current month contract and buying near month contract.The spread gap is 89.
Now Dec gold contract is 19835
Feb Gold contract is 20006
The spread gap is 171
Now my dout is to sell Dec contract and to buy Feb contract or
Buy Dec contract and Sell Feb contract.
How to identify the correct contract for buy and sell .
thank u
regards
bala

.

 

[DanPickUp]

Hi balaj78

There is no general rule, which one to choose. You even can go for spreads like buy now and sell next years Dec contracts ( possible in the states, but I do not know, on which exchange you trade )

If you want to hedge a portfolio, go deeper in the subject. You then go for fundamental informations.

If you only want to trade this kind of future spreads, take what ever you want. Make your chart analysis and make your decision. Check the volatility of the futures you want to trade and check the demand on that future. Put in some little fundamental information and go.

Trading future spreads is really not difficult. If you want to go for the bigger spread, do it.

Take care

DanPickUp

 

[TRADER24]

I have seen your excel sheet, but I didn't understand what exactly do you want to know. If possible please make it in broader term or else please call me I have given my contact detail in this post..........



SIR,
IT WOULD BE VERY HELPFUL IF YOU POST THE EXCEL SHEET FOR GOLD AND SILVER SPREAD EXAMPLES FOR AT LEAST 2 MONTHS ,LIKE YOU POSTED SHEET FOR LEAD AND ZINC . IT WOULD BE VERY HELPFUL FOR US TO UNDERSTAND CLEARLY.ALSO SIR , CAN WE SPREAD TRADE IN SILVER AND SILVER MINI . IF YES ,HOW? WITH BOTH SAME MONTH OR FAR MONTH CONTRACT.
VELURI SIR, ALSO CAN YOU PLEASE POST YOUR BACKTESTED EXCEL SHEET FOR SILVER .I WOULD UNDERSTAND SILVER SPREAD TRADING BETTER.

THANK YOU!!!

 

[hitesh.trade]

Spread Tip:

After learning from iGuru the spread strategy one night i found a huge gap between Turmeric Dec & November futures and after reading the 10 year historical charts of the turmeric i came to know that turmeric always increases in the month of sep-dec.

Right now i am earning 76500 from this strategy and still there is huge gap of - 1,160 Rs/- between dec and oct.

My Spread Strategy:

Buy Dec Turmeric and Sell November Turmeric and exit early.

 

[Pralhad]

is it possible.....??????

Yes, you can plot spread between whatever scrip you want. There is Spread Function in Basic Chart Categary (Amibroker Ver 5.30, earlier version I dont know)

Regards,
-Pralhad

 

[vssoma]

dear,
i am using ami 5.3 version, can you pls. explain it bit clearly....
tnx,

Yes, you can plot spread between whatever scrip you want. There is Spread Function in Basic Chart Categary (Amibroker Ver 5.30, earlier version I dont know)

Regards,
-Pralhad

 

[Pralhad]

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