Regarding the base metals trading at NCX  I am a fan of spread trading Leadmini and Zincmini

Spread trading Leadmini and Zincmini

 Spread trading is essentially taking advantage of difference of price between Leadmini and Zincmini, which is referred as spread gap. Leadmini and Zincmini make ideal pair due to several factors. Leadmini and Zincmini tend to move in the same direction but one commodity will be slower or faster than the other. This makes it an ideal pair to initiate a spread trade.  This type of trading is considered less risky because we go long on one commodity and short the other, depending on the market price action.  So, we are taking a hedge type position in other words, protecting our capital or minimizing our loss.

There are two types of spreads that will be discussed here.

One is Bull spread and the other is Bear spread.

A Bull spread is considered when the market is expected to decline or the spread gap gets greater or wider. A Bear spread is constructed when we expect the market to climb to higher levels.

This strategy is not new.  I will try to explain with some examples. The data provided are MCX  traded prices and  in INR . The prices quoted are for mini lots. If you study the table below you can note that the spread gap varies day to day.

Date	Leadmini	Zincmini	Spread Gap
4/2/2012	105.25	102.55	2.70
4/3/2012	105.50	102.55	2.95
4/4/2012	103.50	102.20	1.30
4/5/2012	105.95	102.90	3.05
4/7/2012	105.90	102.85	3.05
4/9/2012	105.65	102.40	3.25
4/10/2012	104.60	102.60	2.00
4/11/2012	106.05	103.20	2.85
4/12/2012	107.50	104.45	3.05
4/13/2012	106.60	103.00	3.60
4/16/2012	107.35	103.75	3.60
4/17/2012	106.55	102.95	3.60
4/18/2012	106.05	103.10	2.95
4/19/2012	107.85	103.90	3.95
4/20/2012	109.95	104.90	5.05
4/21/2012	110.00	104.95	5.05
4/23/2012	109.05	104.60	4.45
4/24/2012	109.00	104.65	4.35
4/25/2012	109.30	104.85	4.45
4/26/2012	110.70	106.00	4.70
4/27/2012	111.55	106.15	5.40

Take note of Leadmini and Zincmini prices on 4/4/2012 Leadmini is 103.50 and Zincmini is  102.20. The spread gap is 1.30. Since this spread gap is low which favours a Bull spread.  Let us assume we enter a spread trade on 4/4/2012. Our action will be -  we sell Zincmini at 102.20 and buy Leadmini at 103.50. We see the spread gap increases steadily. On the 20^th the spread gap is 5.05 and we decide to close the trade. Now we have to buy what we sold and sell what we have bought. So we sell Leadmini at 109.95 and buy Zincmini at 104.90

Let us see the results of our trade so far.

Leadmini bought at 103.50 and sold at 109.95 

 109.95-103.50 = 6.45 profit of Rs. 6,450

Zincmini sold at 102.20 and bought at 104.90

 102.20-104.90 = -2.70 loss of Rs. 2,700

So from this trade we have a profit of Rs. 3,750 ( 6,450-2,700)

This is an example of Bull spread.

Let us consider a Bear spread now.

On the 21^st we sell the Leadmini and buy Zincmini. We could have sold Leadmini at 110.00 and bought Zincmini at 104.95 when the spread gap is 5.05

On the 24^th we decide to close the trade when the spread gap is 4.35

The results would be Leadmini sold at 110.00 and covered at 109.00

110.00-109.00 = 2.00  profit of Rs.2000

Zincmini bought at 104.95  and sold at 104.65

 104.95-104.65 =- 0.35 loss of Rs. 350

This trade has brought us a profit of Rs. 1,650  for one lot of Leadmini and Zincmini

Now let us go back to first example. Instead of closing the trade on the 20^th  when the spread gap is 5.05 we will close on 4^th when the spread gap is 2.00

The  results of would be

Leadmini bought at 103.50 and sold at 104.60 

 104.60-103.50 = 1.10 profit of Rs. 1,100

Zincmini sold at 102.20 and covered at 102.60

 102.20-102.60 = -0.40 loss of Rs. -400

This trade has brought us a profit of Rs. 700 for one lot of Leadmini and Zincmini

If you can increase the lot size say 2 lots the profits can increase. But till you get familiar with the trades described above it is better to begin with one lot.