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A client recently asked about the spread formula for trading meal versus oil
and I did not have the formula at my fingertips. So I called the trading
floor and was given the formula. I was thinking of adding a handy list to my
desktop or maybe put the info on our company's websites.
I was wondering what common spreads traders are playing these day. Here is
an example of the meal/oil spread formula.
Meal/Oil
Meal - (oil X 6)= premium
141.30 - (17.23 X 6)=premium
141.30 - 103.38= 37.92
Some spreads are straight forward, but some are different and have their own
customs. The MOB spread is Municipal Bonds Over Bonds. But, the Munis are
currently trading at a lower price than the bonds. However, the premium (
which is supposed to mean more) is actually a negative number on the Muni
side of the order.
Thus, the spread is buy Munis and sell bonds at minus X number of points to
the buy or Muni side. This spread is always quoted in total number of ticks.
35 would be 35/32nds and 102 would be 102/32nds.
Same would be true of a NOB, Ten-Year Notes over Bonds.
If you were doing a Ten-Year Option versus a Bond option spread, however, the
premium would be quoted to whichever side is more and the premium would be
quoted in full points and 64ths. Thus if the difference was equal 66/64ths
the premium would be quoted as 1-02 or 1 full point (64/64ths) and 2/64ths.
What other spreads are you trading? How about at the LIFFE or Eurex too?
Regards,
John J. Lothian
Disclosure: Futures trading involves financial risk, lots of it!
Disclosure: John J. Lothian is the President of the Electronic Trading
Division of The Price Futures Group, Inc., an Introducing Broker.
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