Why Take Spread Positions?

[Slider]

I'm starting to research about futures trading and I'm having trouble understanding why you would take a spread position.

If you're doing a common spread like Long Gold/Short Silver, you're only doing it because you think the gains in Gold will be bigger than the gains in silver

Or the Loss in silver will be bigger then the loss in Gold correct?


Now why if you thought both gold and silver were going to go up, wouldn't you just take long positions in both of them?

Is there a certain nuance to analyzing say why Gold would gain more than silver?

Please let me know! If you want to be my futures "coach" and let me bounce questions off you, I'll gladly review hands.

I play a lot of MTTs and 400-1000NL full ring.

[mrbaseball]

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Now why if you thought both gold and silver were going to go up, wouldn't you just take long positions in both of them?


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If you are wrong you would have far less risk and risk avoidance is important in the futures markets because you have so much leverage. I have never traded the gold/silver spread but I have traded both contracts from time to time. I trade commodity spreads for a living, but mainly as a trading vehicle and I would not be comfortable taking a risk spread (ie gold/silver or Russell/Midcap or Euro/Swiss) overnight because despite being spread they can move a great deal. They are however fine scalping instruments with the proper trading software. There are a few types of spreads that I will carry positions in, mainly calandar type spreads and particular arrbitrage spreads I would rather not mention. But even calandar spread can have a great deal of movement. Natural Gas and Live Hog calandars can move more violently than one of the underlying months. I've recently been riding a roller coaster of a thrill ride with Wheat calandar spreads. Even a spread can be more than you can stomach at volatile times.

[eastbay]

Usually it's simply because people believe that the spread behaves in a more predictable/consistent/tradeable manner than the individual holdings.

eastbay

[sillyarms]

Is doing a spread trade trading ev for lower variance?

[mrbaseball]

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Is doing a spread trade trading ev for lower variance?

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Spread trades definitely lower your variance and they also allow the market makers (like myself) to do larger sized trades. Certain spreads tend to "breathe" in a range and can be turned over or held much more confidently than an outright contract can allowing market makers to trade larger which offers more liquidity to the marketplace. Spread trading is more expensive due to to more execution costs. Almost every professional trader I know of (and I'm surrounded by them) trades spreads of one sort or another. Sure there are scalping wizards (mainly in the pits) who can turn size outrights all day long but with the increases of electronic trading those guys are an endangered species.