The Secret of Reduced Margin Spreads
The Secret of Reduced Margin Spreads
One of the best-kept secrets in trading is to reduce margin spreads. You can not specify a trading method that offers
more security or higher returns than reducing margin spread, while at the same time being one of the least time-
consuming ways to trade. Have you ever wondered why the business of so many big, highly powerful merchants spreads? I’m going to show you why!
What is a reduced margin spread?
Due to low volatility, exchanges have reduced margins on certain types of spreads. Spreads are long-lasting in one or
more contracts of a market and low in one or more contracts of the same market but in different months — an
The Secret of Reduced Margin Spreads
intramarket spread; Or being longer in one or more contracts of one market and less than one or more contracts in
another market and in the same or different months — inter-market penetration.
Distortions about spreads
Some distortions regarding spread trading should be removed. If we can get them in the way, I can show you the
amazing benefits of spread trading over other forms of business.
It is said that spreads do not move completely like futures. I agree 100% with that statement. However, the trend
spreads more often than the full future, they tend to be much more dramatic than the full future and they last longer
The Secret of Reduced Margin Spreads
than the full future. For these reasons, you can make more money with spreads than outrights.
The second distortion about spread trading is: “You have to pay double commissions when you trade spreads.” Yes!
You will have to pay two commissions for each spread you enter the market. So what? You pay two commissions
because you are trading two different contracts, one in one place and the other in a completely different place. It is
unfair to pay two commissions for two different trades. I’ll tell you what’s unfair — paying a round-turn commission
for a worthless expiration option. Why don’t you hear people complaining about it? You pay for one round turn and
you only get a half turn. Doesn’t make much sense, does it?
Spread Trading Advantages
The Secret of Reduced Margin Spreads
There are so many benefits to trading reduced margin spreads, I hope I have not run out of room here before I tell
you all. Let’s start with revenue on margin, i.e. yield.
Yield: As I write this, the margin for trading the full futures position in soybeans is $ 1,050, while the spread trade in
soybeans requires only $ 250, only 23%. If Soybean Futures moves a full point, that move is worth $ 50. If a soybean
spread moves one full point, that move is worth $ 50. That means a 5 point positive move in soybean futures or a 5
point positive move in soybean spread earns the trader $ 250. However, the difference in return on margin is
remarkable: the return on futures is $ 250 / $ 1,050 = 23.8%. For spread, return $ 250 / $ 250 = 100%. Think about
it!
The Secret of Reduced Margin Spreads
Leverage: This leads to the next advantage of spread trading — with the same amount of margin, you can trade 4
soybean spreads instead of one soybean future. How is it for leverage? Instead of earning $ 250 in a five-point
move, you can earn $ 1,000. Reduced margin spreads make more efficient use of your margin money.
Trend: I said earlier that spreads tend to be much more dramatic than full futures deals. Moreover, they will be
trending more than the full future. I do not have room here to show you dozens of sharp trending spreads that are
regularly found in the markets, so we will have to settle for the recent ones. You should take my word for it that this
kind of trending often happens when trading is spreading.
The Secret of Reduced Margin Spreads
Opportunities: Spreads tend to be more frequent and more dramatic than futures contracts, they provide more
opportunities to make money and they do so without the interference and noise caused by computerized trading,
scallops, and market movers. Spreads avoid “noise” in markets. Many margin spread opportunities are
enough to keep almost any trader busy. One of the important advantages of trading spreads is that they do not
involve market makers and shakers, which can reduce margins or full margins.
Invisibility: One of the fundamental problems with any kind of trading in futures or stocks or outrights is the
cessation of running. Inside likes it when they can see your order. Even when your entry or exit happens mentally,
they know where it is. They know very well where people give their orders. That’s why they love Fibonacci and Gone
merchants.