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A Real Life Example of How Futures Spreads Reduce Market Volatility

May 23, 2012 by Matt Vitiello| Tips & Strategies

Recently, I had a number of clients involved in a futures spread in the live cattle market. The idea behind the trade was to get long the cattle market heading into the summer by buying in the front month and selling in the back month – specifically, they were buying June Live Cattle and simultaneously selling October live cattle.

This was a trade that most of my clients got involved in on April 19, 2012.

On April 24, 2012, an event occurred that significantly affected the price of cattle. The U.S. Department of Agriculture confirmed that a case of Mad Cow Disease was found in a dairy cow in central California. Officials reported that the deadly brain-wasting illness, known as bovine spongiform encephalopathy, was present in the cow. As a result, the price of live cattle closed at a nine-month low on fears that the largest foreign buyers of U.S. beef – Mexico, Canada, Japan and South Korea – would stop importing American meat.

The case turned out to be an isolated incident, found only in a single cow, and prices bounced back the following day.

Unprecedented times call for unprecedented action. Find out why futures   could be the perfect complement to your trading strategy.…

Spreads vs Outright Futures Contracts

With this rare occurrence, how did the news and movement in the market that day affect the original spread? What if, instead of using a futures spread to get long the cattle market, my clients simply bought the June contract outright by itself?

On April 24th, the June Live Cattle contract opened at 114.725 and closed at 111.575 which is a $3.15 move, equivalent to a $1,575.00 move in a trading account for every one June Live Cattle Futures contract. Had someone been simply long one June Live Cattle contract coming into the trading session that day, they would have been down $1,575.00.

Lem 12 Start

Now let’s take a look at what happened to my clients that had on the futures spread where they bought June Live Cattle but then simultaneously sold October Live cattle. That spread opened at 9.825 on April 24, 2012 and closed at 9.875, which was a difference of .05 cents, or $25.00, in a trading account for every one June/October Live Cattle spread they had coming into that trading session.

Lem2 Start

My point is that both ideas, buying June Live cattle by itself, and buying June Live Cattle while selling October Live Cattle simultaneously as a spread, were trying to accomplish the same goal. However, by using a futures spread, market volatility was significantly reduced that day when the overall market made a huge move down.

EXAMPLES OF HISTORIC PRICE MOVES OR EXTREME MARKET CONDITIONS ARE NOT MEANT TO IMPLY THAT SUCH MOVES OR CONDITIONS ARE COMMON OCCURRENCES OR ARE LIKELY TO OCCUR.

This is an example of how futures spreads trading can help traders with their risk and potentially reduce market volatility. If you’d like more information, please contact us at 800.800.3840.

We’ve been assisting our clients in making sound trading decisions for over 25  years through bear markets, bull markets, and everything in between.  Trust a Daniels Trading broker to help you reach your trading objectives in  any market.

Guide to Futures and Spread Trading

This comprehensive ebook, compliments of Guy Bower, is designed to help you understand and master the fundamentals of futures spread trading.

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Filed Under: Tips & Strategies

About Matt Vitiello

After receiving a BA from the University of Illinois, Matt entered the banking industry as a mortgage loan officer. With close family members involved in the futures markets, Matt always kept a close eye on the markets throughout his involvement in the banking industry. Although successful at the bank, the allure of the markets pulled at Matt, and he ultimately made the leap and joined Daniels Trading.

As a senior broker, his emphasis is getting online and broker assisted traders comfortable with trading software. In addition, Matt has a strong interest in the seasonality of the commodity markets and relays trading ideas and opportunities on a daily basis to his clients. Matt also likes to leverage shared desktop technology to show his customers the ropes one-on-one through online meetings.

Matt prides himself on his ability to match his client’s and prospect’s assets with available opportunities at Daniels Trading. Whether its executing an order or simply sending an email, it is always done with precision and accuracy.

Outside of the office, Matt enjoys traveling and following his hometown sports teams — the Chicago Bulls and Chicago Bears.

Risk Disclosure

THIS MATERIAL IS CONVEYED AS A SOLICITATION FOR ENTERING INTO A DERIVATIVES TRANSACTION.

THIS MATERIAL HAS BEEN PREPARED BY A DANIELS TRADING BROKER WHO PROVIDES RESEARCH MARKET COMMENTARY AND TRADE RECOMMENDATIONS AS PART OF HIS OR HER SOLICITATION FOR ACCOUNTS AND SOLICITATION FOR TRADES; HOWEVER, DANIELS TRADING DOES NOT MAINTAIN A RESEARCH DEPARTMENT AS DEFINED IN CFTC RULE 1.71. DANIELS TRADING, ITS PRINCIPALS, BROKERS AND EMPLOYEES MAY TRADE IN DERIVATIVES FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS RISK TOLERANCE, MARGIN REQUIREMENTS, TRADING OBJECTIVES, SHORT TERM VS. LONG TERM STRATEGIES, TECHNICAL VS. FUNDAMENTAL MARKET ANALYSIS, AND OTHER FACTORS) SUCH TRADING MAY RESULT IN THE INITIATION OR LIQUIDATION OF POSITIONS THAT ARE DIFFERENT FROM OR CONTRARY TO THE OPINIONS AND RECOMMENDATIONS CONTAINED THEREIN.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRADING FUTURES CONTRACTS OR COMMODITY OPTIONS CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING LEVERAGED POSITIONS AND MUST ASSUME RESPONSIBILITY FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR THEIR RESULTS.

TRADE RECOMMENDATIONS AND PROFIT/LOSS CALCULATIONS MAY NOT INCLUDE COMMISSIONS AND FEES. PLEASE CONSULT YOUR BROKER FOR DETAILS BASED ON YOUR TRADING ARRANGEMENT AND COMMISSION SETUP.

YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES. YOU SHOULD READ THE "RISK DISCLOSURE" WEBPAGE ACCESSED AT WWW.DANIELSTRADING.COM AT THE BOTTOM OF THE HOMEPAGE. DANIELS TRADING IS NOT AFFILIATED WITH NOR DOES IT ENDORSE ANY TRADING SYSTEM, NEWSLETTER OR OTHER SIMILAR SERVICE. DANIELS TRADING DOES NOT GUARANTEE OR VERIFY ANY PERFORMANCE CLAIMS MADE BY SUCH SYSTEMS OR SERVICE.

GLOBAL ASSET ADVISORS, LLC (“GAA”) (DBA: DANIELS TRADING, TOP THIRD AG MARKETING AND FUTURES ONLINE) IS AN INTRODUCING BROKER TO GAIN CAPITAL GROUP, LLC (GCG) A FUTURES COMMISSION MERCHANT AND RETAIL FOREIGN EXCHANGE DEALER. GAA AND GCG ARE WHOLLY OWNED SUBSIDIARIES OF STONEX GROUP INC. (NASDAQ:SNEX) THE ULTIMATE PARENT COMPANY.

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Risk Disclosure

THIS MATERIAL IS CONVEYED AS A SOLICITATION FOR ENTERING INTO A DERIVATIVES TRANSACTION.

THIS MATERIAL HAS BEEN PREPARED BY A DANIELS TRADING BROKER WHO PROVIDES RESEARCH MARKET COMMENTARY AND TRADE RECOMMENDATIONS AS PART OF HIS OR HER SOLICITATION FOR ACCOUNTS AND SOLICITATION FOR TRADES; HOWEVER, DANIELS TRADING DOES NOT MAINTAIN A RESEARCH DEPARTMENT AS DEFINED IN CFTC RULE 1.71. DANIELS TRADING, ITS PRINCIPALS, BROKERS AND EMPLOYEES MAY TRADE IN DERIVATIVES FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS RISK TOLERANCE, MARGIN REQUIREMENTS, TRADING OBJECTIVES, SHORT TERM VS. LONG TERM STRATEGIES, TECHNICAL VS. FUNDAMENTAL MARKET ANALYSIS, AND OTHER FACTORS) SUCH TRADING MAY RESULT IN THE INITIATION OR LIQUIDATION OF POSITIONS THAT ARE DIFFERENT FROM OR CONTRARY TO THE OPINIONS AND RECOMMENDATIONS CONTAINED THEREIN.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRADING FUTURES CONTRACTS OR COMMODITY OPTIONS CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING LEVERAGED POSITIONS AND MUST ASSUME RESPONSIBILITY FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR THEIR RESULTS.

TRADE RECOMMENDATIONS AND PROFIT/LOSS CALCULATIONS MAY NOT INCLUDE COMMISSIONS AND FEES. PLEASE CONSULT YOUR BROKER FOR DETAILS BASED ON YOUR TRADING ARRANGEMENT AND COMMISSION SETUP.

YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES. YOU SHOULD READ THE "RISK DISCLOSURE" WEBPAGE ACCESSED AT WWW.DANIELSTRADING.COM AT THE BOTTOM OF THE HOMEPAGE. DANIELS TRADING IS NOT AFFILIATED WITH NOR DOES IT ENDORSE ANY TRADING SYSTEM, NEWSLETTER OR OTHER SIMILAR SERVICE. DANIELS TRADING DOES NOT GUARANTEE OR VERIFY ANY PERFORMANCE CLAIMS MADE BY SUCH SYSTEMS OR SERVICE.

GLOBAL ASSET ADVISORS, LLC (“GAA”) (DBA: DANIELS TRADING, TOP THIRD AG MARKETING AND FUTURES ONLINE) IS AN INTRODUCING BROKER TO GAIN CAPITAL GROUP, LLC (GCG) A FUTURES COMMISSION MERCHANT AND RETAIL FOREIGN EXCHANGE DEALER. GAA AND GCG ARE WHOLLY OWNED SUBSIDIARIES OF STONEX GROUP INC. (NASDAQ:SNEX) THE ULTIMATE PARENT COMPANY.

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