Spread Trading: Margin

[-ooO-(GoldTrade]

Perou>and what's the political for the spread margin?

I ask the question to my broker and he said me:

"1 margin for the buy, an 1 margin for the sell."

He is probably talking about the commissions. There is one for getting into positions and one for getting out.

Perou>I'm very surprised because, I think there's a "spread margin" for some brokers. No?

Perou, Exchanges would not exist if they did not offset the risk of holding open contracts onto Speculators.

Margin is just a good faith deposit that you can cover tonight’s risk. You will be putting it up short term although it is calculated long term. If you do not use it tonight, you can use it tomorrow night.

Therefore, the margin asked from the exchanges mirrors their carefully calculated and perceived risks.

You will find that Seasonal Calendar Spreads, having the least risk in the business also deservedly require the lowest margins. CBOT Spread Margins

As a new Seasonal Calendar Spread Trader, you should only consider taking spreads that the exchange favors with the ultra low Calendar spread margins.

When you read some of the Elite Spread trading posts, and what you can find from Master Ross, you will see that you may need a special type of broker that currently has “winning active End Of Day,” spread traders.

We are pretty lucky our research department gives us the expected margin when Spreads are suggested.

The questions you are asking show that you are already too sophisticated to use a common broker. I suggest that you lose that brokers number and trade directly with a clearinghouse.

Margins are often about $400 - $500 per Calendar Spread. I have traded Eurodollars when margin was about three spreads on $1,000 or Hogs where the spread margin was about $800. Margins vary with the volatility.

With Seasonal Calendar Spreads, margins always lag. The exchange bases the margin requirement to some extent on past performance. We are trading on expected future performance, which could very well include increased volatility.

When things go as we plan, the margin may eventually rise to reflect this increase, by then we may have profits to cover them or be out of the trade altogether.

To over simplify, if the most the spread has moved in one day over the past six months is $500.00. I expect the margin will probably be around there. I don’t think the exchanges have published exactly how margins are determined. But one thing is for sure. “when volatility rises so will the margins.

Calendars in general are in one market. Near contract vs. Far, contract same commodity. When two exchanges are involved, both may want margins. For now, forget “cross-market,” spreads. You will get a higher return on margin with calendars anyway.

This is not rocket science. Being both long and short at the same time smoothes out the bumps. What we are being paid for is not excepting risk, like in stocks. We are being paid a premium, just like insurance, to add liquidity to the market. We make a more efficient market by cushioning the impact commercial forces have on the free market.

So we are usually concerned what the margin is when we actually place the trade, then forget it. Margin delinquencies can be used as a warning that you may be overtrading. Generally, you will want to keep a thousand per spread before adding any more. (see “Spread Trading: How to!”)

 

[-ooO-(GoldTrade]

GoldTrader>You will find that Seasonal Calendar Spreads, having the least risk in the business also deservedly require the lowest margins.

Joe Ross speaks about "reduced margin spreads!"

 

[cclee]

Can you suggest a good broker for spread trading?

Thanks!

 

[-ooO-(GoldTrade]

Max875>I corresponded with Joe Ross like you suggested. He mentioned on average, positions are held 4-5 days.

Joe gets more profits per day by taking such short trades. He has a money management technique that takes retires a third of his position in a day or two. This affects the average length of the trades. This is short term trading.

Max875> After reading some of you threads I was under the impression that the average holding period was about 1-6 months.

Weeks Max, weeks. The average “seasonal calendar spread,” is about six weeks.

The difference I think you are observing here is the historicialy-tested length of the spread itself, which is about six weeks. And the actual holding period of your trade. Which can be longer or shorter depending on how much action you want. Some traders are in and out all over the seasonal pattern instead of riding it out.

Trade only in the direction of the seasonal trend during the time period you choose to make these trades. Peaks often occur before the seasonal window closes, so bailing out early will lead to higher profits in some cases.

Max875> He also mentioned that about 8% of capital is allocated per spread trade.

This is pure money management. Some people use 1%. Study “Tharp,” and come up with your own formula. The 8% that you speak of is the amount of risk between defined by your stop. Not the amount of capital in your account.

For example if the margin on your spread is, $500.00 and you run a stop at $300. Then $300.00 is the risk you will be using for the 8%. You would be withholding $3,750.00 capital to trade this spread short term.

I find with the longer-term trades that we get from Jerry Toepke's WSC, that one calendar spread per $1,000.00 works well when spreads are in season.

Max875> Joe also said candidates are uncovered by:

Ok What you are referring to here is “if you are going to go looking for these spreads yourself.”

Look at the big picture. Take Corn for example. Corn is harvested around Halloween. So, the supply should be greatest at that time of year. So all you have to do is buy corn at Halloween. The grain silos are full, grain users have all the corn that they need. Farmers are dumping it on the ground to feed the Hogs.

But what about six months later. The silos are half empty, the farmer is afraid there may not be enough rain, other farmers are afraid there may be too much rain. Uncertainty is in the air. Grain holders will adjust the price to have enough to make it until the next harvest. Prices will be higher.

Now suppose we look at a seasonal chart for corn. Suppose we put on a contract near the annual lows, and look to get out near the high. In a case like that, what day or even what week we get in or out will not affect profits very much if you take the trade, year after year.

Max875>
1. HIGH CORRELATION SPREADS
2. SEASONAL SPREADS
3. BACKWARDATION
4. OBSERVATION
5. CHART FORMATION

The research used by the exchanges isolates “Seasonal Calendar Spreads, that correlates with the past. Jerry Toepke's WSC comments on fundamental, and technical aspects that may influence your decision to Spread or not.

Your study of chart patterns and other factors will help you with your one task in this method. How many to Buy, hold or sell today.

Please let me explain. Lets say we have a trade that starts on Friday. You can take the trade. But suppose you see some chart pattern in the “close only,” chart that has yielded huge profits before. Because of your understanding of what might be going to happen you will adjust your position size accordingly.

Max875> I was wondering if you could provide me with any other sources of historical annual returns for seasonal spread trading?

I think you are getting off course here. We are being paid to make decisions under uncertainty, Papertrade something if you are afraid to trade. No matter what a spread has done historically. It is your skill in Position Sizing that will determine how much you will profit from any given six week pattern.

Just take a seasonal calendar trade that has been successful for 15 consecutive years and has the current fundamentals and technicals in place to do better than average this year.