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Trade Futures Using an Inter-Exchange Spread Strategy

An inter-exchange futures spread is executed by trading two contracts of similar financial instruments on two different exchanges. Inter-exchange spreads rely on both the differences and similarities of contract attributes.

By simultaneously purchasing and selling two futures contracts on different exchanges with the same expiration or ‘rollover’ months you are following the relationship between exchanges without having to focus on market direction. The objective of an inter-exchange spread is to potentially benefit from either the narrowing or expanding of the difference in contract price.

Trade an Inter-Exchange Spread Using Time Difference

Similar commodity futures contracts could potentially be used to trade a complementary relation between two similar financial instruments. For example, below is a chart comparing a WTI Crude Oil (CL) and a Brent Crude futures contract (B):

Using different indexes as the basis, the WTI Crude Oil (CL), which trades on the NYMEX and Brent Crude futures contract (B), which trades on the ICE exchange, could be traded using an inter-exchange spread. If both ‘legs’ of the inter-exchange spread were purchased simultaneously, a trader could buy one Brent Crude futures contract (B) and sell one WTI Crude Oil contract (CL). The other contract of a different commodity or second leg is meant to act as a hedge or safety net.

Buying one commodity futures contract while simultaneously selling another with similar attributes in an inter-exchange spread potentially enables a trader to use them as day trading indicators of:

  • Historical patterns of one the two exchanges lagging reaction time to new market moving events
  • Widening and tightening of the price difference between the two contracts traded on separate exchanges

Lagging exchange reaction time or widening/tightening of contract price could potentially be attributed to one contract’s price action moving at a higher rate up or down than the other.

A potential exit strategy could be to set a ‘trailing stop’ with your online day trading platform to execute simultaneous sell and buy orders counter to your existing positions in the inter-exchange spread.

These spread based futures trading strategies will potentially allow a trader to benefit from the strong momentum of one index while protecting against a reversal or slow-down in momentum of the initial contract.

When trading a spread strategy, it is important to note the risk if the spread moves against your position. Always keep in mind that implementing an inter-exchange spread does not assure a beneficial trade. As with any trading strategy, inter-exchange spreads involve risk that has to be managed. Additionally, as you would be opening a secondary trade to complete the spread, commissions and fees would apply to this trade as well.

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