I've started listening to Guy Bowers podcast and his most recent two were about spread trading the futures markets. The concepts explained piqued my interest.
Bowers offers a "course" in spread trading however before I spend the money I would like to do some independent education. I'm wondering if anyone has a free resource I can use to learn the basics.
I am just looking to learn more about the basics of spread trading. I am very experienced in futures trading on an intraday basis so I don't need to learn about how futures work.
Some of the things mentioned on the podcast were as follows:
1) Lower margin requirements as opposed to outrights. How does that work?
2) Limited risk. I've always thought futures had unlimited risk. Is there something about spreads that limit your risk?
So if anyone can point me to a resource to learn the basics of spread trading it would be appreciated. One link Bowers has is to
https://www.seasonalgo.com/ which looks like it would be very useful in analysis of spreads. Are there any other sites like this?
Thanks in advance!
You can start from CME:
https://www.cmegroup.com/education/courses/understanding-futures-spreads.html
And yes, generally, spreads will have lower margin requirements since there are 2 opposing legs in 2 different expirations, so practically, risk is lower than the outright or directional (But not always).
The Exchange & Clearing House will define each spread margins and this will be subject to change based on several factors.
About limited risk, no futures spreads are not limited risk, they still come with unlimited risk.
The catch with spreads is that you are tempted to trade them in bigger size (Because they offer lower margin requirements) and also because the movements are usually small (compared to the outright), so without realizing, you end up taking a much larger risk (Thinking that it's not that risky), while in fact it is, so you have to be aware of that.
Future spreads also tend to be not that liquid (When you trade them natively). Many exchanges & brokers support native spread orders, where you don't have to worry about executing 2 legs separately. You just submit a spread order and that's it. At the end of the day, you want to buy a corn spread for +1, you don't really care if you long March21 Corn at 400 and short June21 Corn at 399 or long at 500 and short at 499, the spread order handles this.
Back in 2008, I lost over $120k in a single spread trade over the course of 1 week (it was the expiration week). It was partially my mistake, because I was holding a very large position in a relatively illiquid market and the 2008 general conditions even made it more illiquid and I didn't close out my position (Or even reduced it) until expiration was very close, so with 1 week to expiration, I was like pinned and I had to close out, someone on the other side took advantage of that and I was screwed of course.
Anyway, so you need to watch out for those when you are trading spreads. Also you can't rely only on seasonality of the spread or on technical analysis or chart analysis. You must understand the fundamentals of the market very well, because spread trade ideas are primary based on fundamentals (Or seasonality if you are playing on seasonality, which is also derived from fundamentals).
Hope this helps and good luck.
