Volatility

While some spreads are less risky than flat positions in SSFs, some spreads are much more risky than flat positions. The degree of risk in a spread depends essentially on two factors:

•  The difference in time span between the contract months in
an intramarket spread determines one aspect of spread volatil
ity. The larger the time span between the two months being
spread, the larger the volatility, the larger the risk, and the
larger the possible profit. A long March Ford versus a short
June Ford spread is not as inherently volatile as a long March
Ford versus a short December Ford spread.

•  The degree of similarity between two different SSFs is also an
operative factor in the volatility of an SSF spread. A spread
between June General Motors and June Ford will likely not be
as volatile as a spread between June General Motors and June
Chevron-Texaco.

Finally, the SSF market also allows spreading between SSFs and narrow-based indexes (NBIs) as well as spreads within NBIs. As an example, consider the following possible spreads:

•  Long Ford versus short the Oil Services NBI

•  Long Wal-Mart versus short the Drugs NBI

•  Long the Defense NBI versus short the Investment Banking
NBI

As you can appreciate, there are literally hundreds if not thou­sands of possibilities. A good rule of thumb in trading SSF spreads is to have a fundamental basis for trading the spread. In other words, I suggest that you begin with an idea that makes sense. This will become clear to you as we examine a few spread examples in the pages that follow.

Here are a few spread examples:

Long June AT&T futures/short December AT&T futures Long June Ford futures/short June General Motors futures

Both of the above trades are spreads. The first spread, long June AT&T futures/short December AT&T futures is an intramarket spread because it involves two different contract months in the same stock. The second spread, long June Ford futures/short June General Motors futures is an intermarket spread because it involves two different stocks.

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