Don Dawson
Online Trading Academy
I received an email from a student in Singapore regarding the margin for Spread trading and where to find it. Spread trading is gaining more popularity, even internationally based on the emails I have been receiving. Let’s now look at two different Futures Exchanges and identify the process of figuring out how much Margin (capital) is required to trade these things called Spreads.
Spread trading involves the simultaneous purchase of one month and simultaneous sale of another month of the same Commodity to be an Intra-Commodity Spread. To simultaneously purchase and sell related Commodities is known as an Inter-Commodity Spread.
The Intra-Commodity Spread is the least volatile and risky of the two. Notice I said “least†not “risk freeâ€. All investments have some degree of risk associated to them. Because of this less risk and volatility they require the least amount of Margin to trade. Spread trading is almost like being a Commercial in the markets. You are actually hedging your risk by being both long and short simultaneously of the same market. The Spread makes money when one month out performs the other based on the supply/demand of that Futures market (not technical levels of supply/demand).
The Inter-Commodity Spreads require the simultaneous purchase and sale of related markets. For example Lean Hogs/Live Cattle, Corn/Soybeans, Japanese Yen/British Pound, 10 Year Treasury/ 30 Year Bond, etc. Because they are just related and not the same market these Spreads can actually have both the long and short go against your position at times, making them more risky. The intra-day range on these Spreads tend to be wider too creating more volatility.
To find the amount of Margin required for Spreads you can visit the Exchange website the product trades on or your brokerage firm (if they are setup to trade Spreads and Trade Station is not). Here are the two primary markets here in the United States:
www.cmegroup.com Chicago Mercantile Group Exchange (CMEGroup)
www.theice.com Inter-Continental Exchange (ICE)
We will review the Soybean market that trades on the CMEGroup Exchange and the Cocoa market that trades on the ICE.
To trade an outright Futures contract (either long or short) the margin for Cocoa would be Initial Margin of $935 and Maintenance of $850. To trade a Spread of the Cocoa market you would have reduced Margin. Figure 1 will illustrate what a Margin page for Spreads looks like on ICE for Cocoa.
There are Spreads known as Butterfly’s that have 3 or more legs (longs and shorts), but we will focus on the calendar Spreads of just two legs.
Above we can see two boxes – Speculative Maintenance and Speculative Initial. These values represent the Margin required to trade these Spreads. Don’t let the term “Tiers†confuse you. This is all you need to know about Tiers. Each Commodity Futures contract has different expiration months trading during the session. Each of these months will be assigned a Tier. For Cocoa these months are:
This content is intended to provide educational information only. This information should not be construed as individual or customized legal, tax, financial or investment services. As each individual's situation is unique, a qualified professional should be consulted before making legal, tax, financial and investment decisions. The educational information provided in this article does not comprise any course or a part of any course that may be used as an educational credit for any certification purpose and will not prepare any User to be accredited for any licenses in any industry and will not prepare any User to get a job. Reproduced by permission from OTAcademy.com click here for Terms of Use: https://www.otacademy.com/about/terms
Editors’ Picks
EUR/USD hits two-day highs near 1.1820
EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.
GBP/USD reclaims 1.3600 and above
GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.
USD/JPY drops back below 157.00, as focus shifts to Japan snap election
USD/JPY is back in the red below 157.00 in the Asian session on Friday. The Japanese Yen recovers ground against the US Dollar amid some profit-taking ahead of Japan's snap general election on Sunday. The preliminary reading of the Michigan Consumer Sentiment Index report for February will be released later on Friday.
Editors’ Picks
EUR/USD: US Dollar to remain pressured until uncertainty fog dissipates Premium
The EUR/USD pair lost additional ground in the first week of February, settling at around 1.1820. The reversal lost momentum after the pair peaked at 1.2082 in January, its highest since mid-2021.
Gold: Volatility persists in commodity space Premium
After losing more than 8% to end the previous week, Gold (XAU/USD) remained under heavy selling pressure on Monday and dropped toward $4,400. Although XAU/USD staged a decisive rebound afterward, it failed to stabilize above $5,000.
GBP/USD: Pound Sterling tests key support ahead of a big week Premium
The Pound Sterling (GBP) changed course against the US Dollar (USD), with GBP/USD giving up nearly 200 pips in a dramatic correction.
Bitcoin: The worst may be behind us
Bitcoin (BTC) price recovers slightly, trading at $65,000 at the time of writing on Friday, after reaching a low of $60,000 during the early Asian trading session. The Crypto King remained under pressure so far this week, posting three consecutive weeks of losses exceeding 30%.
Three scenarios for Japanese Yen ahead of snap election Premium
The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.
RECOMMENDED LESSONS
Making money in forex is easy if you know how the bankers trade!
I’m often mystified in my educational forex articles why so many traders struggle to make consistent money out of forex trading. The answer has more to do with what they don’t know than what they do know. After working in investment banks for 20 years many of which were as a Chief trader its second knowledge how to extract cash out of the market.
5 Forex News Events You Need To Know
In the fast moving world of currency markets where huge moves can seemingly come from nowhere, it is extremely important for new traders to learn about the various economic indicators and forex news events and releases that shape the markets. Indeed, quickly getting a handle on which data to look out for, what it means, and how to trade it can see new traders quickly become far more profitable and sets up the road to long term success.
Top 10 Chart Patterns Every Trader Should Know
Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and selling pressure. Chart patterns have a proven track-record, and traders use them to identify continuation or reversal signals, to open positions and identify price targets.
7 Ways to Avoid Forex Scams
The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?
What Are the 10 Fatal Mistakes Traders Make
Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.
The challenge: Timing the market and trader psychology
Successful trading often comes down to timing – entering and exiting trades at the right moments. Yet timing the market is notoriously difficult, largely because human psychology can derail even the best plans. Two powerful emotions in particular – fear and greed – tend to drive trading decisions off course.