How to trade Calendar Spreads Profitably on Heckyl’s Commodity Platform

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Calendar spread trading in commodity futures market has traditionally been executed by professional traders. However, anyone can carry out such trading strategy by understanding how to implement it in real market conditions.

Calendar spread is a futures spread between two months (For e.g. November 2016 and February 2017) in the same market (For e.g. MCX Silver Mini). One can calculate spread by subtracting near month’s contract price from next month’s contract price.spreadsFor example, MCX Silver Mini (SilverM), Nov’16 – Feb’17 spread can be calculated by subtracting November 2016 expiry contract price from February 2017 expiry contract price (See table 1 below).

[Table 1]

Generally, difference between spread for one contract should be in line with another contract. If spread for one contract is not in line with another contract, then such cases offer opportunity to trade.

For instance, MCX Silver Mini calendar spreads for September 13 highlighted trading opportunity. Spread for Nov’16 – Feb’17 was Rs 978 on September 13, implying that February 2017 expiry contract was priced Rs 978 higher than the November 2016 expiry contract. On the contrary, spread for Feb’17 – Apr’17 stood at Rs 403, which was less than half of Nov’16 – Feb’17 spread (See image 2 below).

Ideally in such cases, spread for Feb’17 – Apr’17 should move up in subsequent sessions to match the spread level of Nov’16 – Feb’17 .

MCX Silver Mini Calendar Spread on 13th Sept., 2016

[Image 2]

A trader can be long one futures contract and short another. The trade can either be long Feb’17 Silver Mini and short Apr’17 Silver Mini or short Feb’17 Silver Mini and long Apr’17 Silver Mini.

In this case, buying MCX Silver Mini April 2017 expiry contract and selling February 2017 expiry contract was suggested on expectations of increase in spread for Feb’17 – Apr’17 subsequently.

Later, Feb’17 – Apr’17 spread rose to Rs 652 on September 14 (See image 3 below). On September 15, spread for Feb’17 – Apr’17 increased further to Rs 749 (See image 4 below).

MCX Silver Mini Calendar Spread on 14th Sept., 2016image-2_mcx-silverm-sep-14
[Image 3]

MCX Silver Mini Calendar Spread on 15th Sept., 2016
[Image 4]

One could have made profit of Rs 1,730 per lot (calculated as [749-403]*5) by initiating calendar spread trade on September 13 and covering the same position on September 15.

To put this into perspective, the margin required to hold a single leg of the spread was approximately Rs. 12,000 on September 13 and the margin requirement in case of calendar spread trade is half of naked futures’ margin.

So profit of Rs 1,730 per lot gets translated into 29 percent gain (before brokerage and taxes) on an initial investment of approximately Rs 6,000 in four days.

Risk in calendar spread trading strategy is lower compared to naked futures positions as opposing positions are taken in different expiries of the same underlying commodity. This is why the margin requirement for calendar spreads is generally half of the margin required to hold one leg.

Calendar Spread provides plenty of such opportunities daily. By using Heckyl’s Calendar Spread Screen, one can not only spot trading ideas, but also can make handsome profit with limited risk and minimum capital.

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