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A Real Life Example of How Futures Spreads Reduce Market Volatility

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.

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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.

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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.

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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

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

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