Many clients have been asking spread system queries and last week's action in the gold and platinum markets provides us with a superb chance to have this debate. The chart at the end of this article will supply more detail. The red line on the bottom is how much gold is worth relative to platinum ( gold close / platinum close ). This could be a monthly chart and you can see the spread, together with platinum, have damaged their trends returning to '01. This suggests that the costs of these 2 metals are converging. One should be short platinum and long gold. The way I see it, the cost of platinum has been worked over far worse than gold. I assume the world slow- down eventuality may be impacting the producing base for platinum more than inflationary / deflationary issues are effecting the hopeful nature of the gold market. Gold has held above its trend line, regardless of the U.S. Greenback's important rally. Profitable spread trading needs more than envisioning the general directions of the 2 markets concerned. The dimensions of the contracts, tick size and volatility also have to be considered. In this example, there's just one platinum contract to choose between. However, there are 4 actively traded gold contracts in 3 different sizes and on 2 different exchanges. Even the easy presumption that one fullsize contract of each should be adequate would be inaccurate. Lately , platinum is moving around $67 every day in the commodity market and gold is moving around $25 each day. Would it be acceptable to try and even these out by trading two gold contracts vs one platinum contract? Here is the strategy I use to suitably size my spread trades. Firstly, I work out the average range for each market relative to the time-frame I predict my trade happen in.
In this situation, I'm taking a look at monthly charts. Therefore, I calculate the twenty-one day average range for each market and come up with $21 for gold and $67 for platinum. The subsequent step is to multiply each of these median daily ranges by the market's point price. Gold is $21 X $100 = $2100 each day average movement. Platinum gives us $67 X fifty = $3350 in average every day movement. Obviously , one full-size contract of each isn't an even spread. Now, since we think we know that we only have one platinum contract to work with, our only opportunity for correct sizing in the commodity market ( there are option strategies available, as well ), is to take a look at the list of available gold contracts.
One full size gold contract gets us to $2100 each day and leaves us with a $1200 every day hole to make up.
Chicago's mini sized gold contract is 33.2 oz.
( third full-size ). That would bring our total to $2793 on the gold side of the trade. This will not square the ledger. New York's mini sized gold contract is fifty oz. ( half fullsize ). That would make our total $3150. That is close. Clearly , the other choice is to use 2 Chicago mini contracts and bring our total to $3486. At about that point, it boils down to private bias. Would one rather be more or, less long gold relative to platinum. I am hoping this quick outline answers more questions than it creates. However, please be at liberty to post any concepts, comments or, issues.