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Tom Cathey wrote:
> Bob Fulks wrote :
>
> > The spread is about the same in dollars for a typical order.
>
> However, if you look at the total value you are "buying", about $14,000
> controls you $275,000 of S&P 500 "stock" .
> For the same comparison, you would need 18,333 shares of the $15
> stock....thus, your 1/8 point spread would now cost you 18,333 shares X
> .125 = $2,291 !
The problem with spreads, if one is trading at the market (which is only
preferable in certain situations anyway), is that one becomes subject to paying
them. For instance, say our stock doesn't move, and you sell your 1000 shares
at the bid, with a 1/8 spread, for a $125 loss. Say the same thing happens
with the futures contract, and you lose a similar amount. Now, the dollar
amount you have controlled doesn't have any bearing on this, of course. Now,
whatever happens to each trade in terms of their movement, these costs will
always be fixed on a per share or per contract basis.
Many of the more liquid stocks now trade with spreads of only 1/16, or this can
be obtained by getting an inside fill. On these trades, the cost per 1000
shares now is only $62.50. Personally, I rarely go over 1/16 here, but to
stick to the original example, let's assume that the typical spread that our
trader is subject to in his stock trades is 1/8, with an average price of $50
per share. Also, I'll assume that the typical spread for S+P futures given is
accurate. Now, in order for a meaningful comparison to be made here, we need
to look at the cost of the spread per a fixed amount of capital. Say our
traders have 52k each to trade with - the futures trader would be trading 4
contracts, and paying a spread of $400 each way ($800). Our stock trader, on
RegT (he's a day trader, and thus doesn't have to pay margin interest, for the
sake of simplicity), trades 2080 shares, and incurs a spread cost of $260 each
way ($520) - considerably less than the futures trader with an equal amount of
capital.
Now, whether or not our traders have a higher potential for returns on their
capital through these trades is another issue - the spread cost, as a
percentage of their outlay, can easily be lower.
Regards,
A.J.
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