How to do Lead Zinc Spread trading


I welcome visitors to this post.

In this post, I have written about Spread trading Leadmini and Zincmini. Spread trading is essentially taking advantage and capitalizing of difference of price between two different stocks or commodities. This price difference is referred as spread gap. I have selected Leadmini and Zincmini as example for various reasons. Leadmini and Zincmini often found in the same mines. 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 to say it in other words, we protect our capital or minimize 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 spread gap is expected to widen or the price to increase. A Bear spread is considered when the spread gap is expected to narrow or the price gets lower.

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

Date
Leadmini
Zincmini
Spread
11/1/2012
115.05
103.45
11.60
11/2/2012
113.30
100.10
13.20
11/3/2012
113.60
100.30
13.30
11/5/2012
116.80
101.25
15.55
11/6/2012
118.75
102.55
16.20
11/7/2012
119.05
102.20
16.85
11/8/2012
121.15
103.80
17.35
11/9/2012
118.75
103.15
15.60
11/10/2012
118.70
102.95
15.75
11/13/2012
118.75
104.05
14.70
11/14/2012
120.00
105.55
14.45
11/15/2012
121.00
106.20
14.80
11/16/2012
120.05
105.50
14.55
11/17/2012
119.95
105.35
14.60
11/19/2012
120.55
105.45
15.10
11/20/2012
119.60
105.05
14.55
11/21/2012
118.85
104.85
14.00
11/22/2012
119.50
105.15
14.35
11/23/2012
121.85
107.70
14.15
11/24/2012
122.05
107.80
14.25
11/26/2012
121.50
109.30
12.20
11/27/2012
122.20
109.35
12.85
11/28/2012
121.95
109.50
12.45
11/29/2012
121.95
110.20
11.75
11/30/2012
122.00
111.10
10.90


The Bull Spread explained
From the above chart note the prices of Leadmini and Zincmini on 11/1/2012 Leadmini is 115.05 and Zincmini is 103.45. The spread gap is 11.60.  Let us assume we enter a Bull spread trade here. Our trade will be -  we buy Leadmini at 115.05 and sell Zincmini at 103.45. From 11/1/2012 onwards we see the spread gap increases steadily. On the 13th the spread gap is 14.70. Here the spread gap difference becomes 3.10 (14.70-11.60). We decide to close the trade at this point. Now we have to sell what we have bought and buy what we sold. So we sell Leadmini at 118.75 and buy back Zincmini at 104.05


Bought
Sold
Profit/Loss
Leadmini
115.05
118.75
3.70 ( Minus Rs.3,700)
Zincmini
104.05
103.45
-0.63  (Rs. 600)
Total profit  3700-600
Rs 3,100


This Bull spread trade we have a profit of Rs. 3,100  

The Bear Spread explained
On the 20th the spread gap stands at 14.55 and we sell the Leadmini at 119.60 and buy Zincmini at 105.05.  Towards the end of the month that is on the 29th the spread gap is 11.75. Here we have to close the trade because the month end and advantage of spread gap difference. We buy back the Leadmini at 121.95  and sell Zincmini at 110.20 to close the trade.


Bought
Sold
Profit/Loss
Leadmini
121.95
119.6
-2.35 ( Minus Rs.2,350)
Zincmini
105.05
110.2
5.15 (Rs. 5150)
Total profit  5150-2350
Rs 2,800

This trade has brought us a profit of Rs. 2,800 for one lot of Leadmini and Zincmini
This type of trades can be done in currency pairs also giving a modest return.  All what requires is judgment of the direction of the commodity involved. If one is familiar with the movement of price and the price band in which the commodity is, this type of trade can bring safe but sure returns for the margin money involved.

Thanks for your visit.


5 comments:

  1. Hi,how to find out the spread difference?

    ReplyDelete
    Replies
    1. The Spread difference is actually the difference between the closing rates of both the commodities at the end of the days trading.

      Thanks for visiting my blog
      Rajan Jothimani

      Delete
  2. Nice information to trade in Zinc and Lead, I always trade with the help of tips provided by market experts or advisory firms. I follow best stock trading tips for a huge profit.

    ReplyDelete
  3. please tell me other two pair of commodity

    ReplyDelete
  4. Traders with good market knowledge can frame a useful trading strategy according to the market needs. Earning good returns from market is not so difficult. Traders who are unable to earn well can use experts mcx tips and more for earning well from market.

    ReplyDelete