Spread trading is a little known concept here in India, but if you are a swing trader with a slightly longer time frame in terms of holding your trades, there are potentially great trading opportunities if you are correct in your assessment of the markets.
The opportunity is identifying pairs within a sector or even two different indices within an exchange and utilize the opportunity when you know that one instrument is far outtrading the other.
In the trading room, we love to follow the movements of the BankNifty and it's a little secret that the BankNifty has been the stronger of the two indices.
Have a look :
The upper chart is the Banknifty spot and the lower chart is the Nifty spot plotted on the same scale.
Now if you had been long BankNifty and short Nifty from say the last one month, you would have potentially made a 8- 10 % return on the spread with minimal risk.
This chart below illustrates :
The chart projects a 30 minute picture of a long banknifty short nifty trade with an ATR below.
As can be seen the ATR is fairly flat over a one month period which makes it an excellent spread opportunity.
This spread is currently trading above it's 2 year high, which means that it is time to book gains or even reverse the pair from here.
This information tells us that relatively speaking the BankNifty may stop out- performing the Nifty over the shorter term.
I want to place another chart where I feel the outperformance of another index may be coming to an end too.
We all know that Gold has been a more solid performer than Silver over the past 3 months.
Have a look :
The chart above is the Silver and Gold current month futures on the same time scale.
Unlike the NFBN chart above, it is obvious to the naked eye that Gold has been more bullish than silver from mid- may.
The chart below shows a trade with long Gold and short silver :
The chart shows the spread rising from 0.48 to 0.54 which puts the trade in the green.
These are market neutral strategies and would give you returns irrespective of market movement as long as you pick the right spread.
Once can also pick up pairs within sectors say a long Axis bank and short SBI trade within BankNifty or a long CAIRN, short ONGC within the energy sector.
I'll update at least one pair in the coming week and we will monitor it on paper.
Have a good weekend.