Spread Order

Spread Order

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A Spread Order is a combo order used for rolling over future positions from one expiry to another in the stock markets.
Suppose somebody has a buy open position in Nifty futures contract expiring on the last Thursday of the month. On or before the expiry date, if he wishes to carry forward his position to the next month he can do it manually by selling the current month’s contract and buying the next month’s Nifty Future.
However, there is always a probability that while doing the above execution manually there can be a difference in the execution price. For instance, if the current month Nifty futures is trading at 8050 & the next month’s futures contract is trading at 8100. So the price difference is Rs. 50. However, suppose a trader first sells current month nifty future at 8050 but while buying the next month’s contract the price moves up to 8110. So instead of a difference of Rs.50, the customer would have to incur a difference of Rs. 60 resulting in an execution loss of Rs. 10. The solution to the above problem is using the “Spread Order” while trading with SAMCO.
All one needs to do is put the price difference which a trader is willing to for the above transaction, say 50 in the above case. All he needs to do is put a “Buy Spread Order” with a buy price of Rs. 50 and if someone else in the market wishes to convert a reverse position (i.e. to buy the current month contract and sell the next month) he will put a “Sell Spread Order” at Rs. 50.
A Buy Spread order is used for rolling over a buy (long) position to the next month and the trade involves selling the current month’s contract and buying next month’s contract.
A Sell Spread order is used for rolling over a sell (short) position to the next month and the trade involves buying the current month’s contract and selling next month’s contract.
Also if you put 2 limit orders for buying and selling the margin required to enter the trades would be different for both the contracts. For Nifty , you would require approximately Rs. 97,000. However, with the spread order, the margin required would be around Rs. 12,450.
The process of entering a Spread Order is as follows:
Start taking the benefits of the Spread Order today!
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CME Group is the world's leading and most diverse derivatives marketplace. The company is comprised of four Designated Contract Markets (DCMs). Further information on each exchange's rules and product listings can be found by clicking on the links to CME , CBOT , NYMEX , COMEX © 2020 CME Group Inc. All rights reserved. About CME │ Disclaimer │ Privacy Policy
GC2 nets out the working exposure for both positions as long as both Buy/Sell sides exist for the spread, and applies a Spread
Adjustment Factor to
all working spread orders.
The Spread Adjustment Factor is a single percentage value applied to all qualifying spreads and only applicable to working spread orders. The spread’s working margin value is “unwound”, or recalculated, if the spread order’s open quantity matches partially. (See Example 4 below). The Spread Adjustment Factor:
All of the following conditions must be valid before the Spread Adjustment Factor is applied:
Spread Adjustment Factor Application and Exception Examples
For a Eurodollar bundle, the Spread Adjustment Factor does not apply because all the future legs are on the same side.
Intra-Commodity Covered (single option leg and single future leg)
For 10-yr Note option call covered by the 10-yr Note future, the Spread Adjustment Factor does not apply because the spread crosses over futures and options Product Types.
Inter-Exchange Future Spread across Control Groups
For DME/NYMEX energy future calendar spread, the Spread Adjustment Factor does not apply if the Risk Admin defined the DME and NYMEX across two Control Groups. If the Risk Admin has grouped them in the same Control Group, then the Spread Adjustment Factor would apply.
Intra-Commodity Covered (two option legs and single future leg)
For Eurodollar Put Vertical covered with a Eurodollar future, the Put Vertical – by definition – includes two different option legs (same month but different strikes). In this case, the entire spread will not qualify for the Spread Adjustment Factor because at least two of the legs cross over Product Types (i.e. the spread is not “all futures” or “all options”).
Intra-Commodity Option Spread across Control Groups
Assume a 10-leg generic UDS is created wherein 6 of the legs are CBOT option products (buy call and put options) and the other 4 legs are CME option products (sell put options). The Risk Admin has CBOT and CME products in separate Control Groups.
The 6 CBOT option legs will have the Spread Adjustment Factor applied because the call and put options offset. The resulting working margin will be applied to the CBOT Control Group.
The 4 CME option legs will not have the Spread Adjustment Factor applied because the put options do not offset. Each of the four options’ full margin rates will be applied to the CME’s Control Group’s working margin.
Note: GC2 enforces Inter-Exchange Spreads (IES) at the leg-level.
Breach of the exposure limit on one or more of the exchange groups, results
in the rejection of the IES order.
When a spread meets the criteria specified above, the following calculations
are applied:
Calculate Value A = Spread’s total margin
Calculate Value B = Spread's total margin in absolute value terms
Calculate Value C = Value B multiplied by the Spread Adjustment Factor
Determine the spread’s working long value
Determine the spread’s working short value
Example 1 - Inter-Commodity Futures Spread BUY 1 CORN vs WHEAT Future Calendar Spread (+2:-1) Ratio CORN Margin = $1500, WHEAT Margin = $2500 Value A = Corn (1 order qty * 1500 margin * 2 leg ratio ) - Wheat (1 order qty * 2500 margin * -1 leg ratio ) (3000 - 2500) 500 Value B = abs (1 order qty * 1500 margin * 2 leg ratio ) + abs (1 order qty * 2500 margin * -1 leg ratio ) Value C = (Value B * Spread Adjustment Factor) (5500 * 0.10) 550 Determine working long value Since Value A is positive then working long for Corn is equal to (Value A + Value C) or (500 + 550) or 1050 Determine working short value Since Value A is positive then working short for Wheat is equal to (-1 * Value C) or (-1 * 550) or -550
Example 2 - Intra-Commodity Futures Spread Sell 3 CORN Future vs CORN Futures Calendar Spread (1:-1) Ratio CORN Margin $2000 Value A = Corn (-3 * 2000 * 1) + Corn (-3 * 2000 * -1) = 0 Value B = abs (3 * 2000 * -1) + abs (3 * 2000 * 1) = 12000 Value C = Value B * Spread Adjustment Factor (12000 * 0.10) = 1200 Determine working long value Since Value A is zero then the working long value is Value C or $1200 Determine working short value Since Value A is zero then the working short value is (-1 * Value C) or (-1 * $1200) or -1200
Example 3 - Intra-Commodity Options Spread Buy 100 eMini S&P Strangles (1put: 1call ratio) Put Margin = -$280; Call Margin = $200 Value A = Put (100 * -280 * 1) + Call (100 * 200 * 1) = -8000 Value B = abs (100 * -280 * 1) + abs (100 * 200 * 1) = 48000 Value C = Value B * Spread Adjustment Factor (48000 * 0.10) = 4800 Determine working long value Since Value A is negative then the working long value is Value C or $4800 Determine working short value Since Value A is negative then working short value is (Value A - Value C) or (-8000 – 4800) or -12800
Example 4 - Unwinding a Partially Matched Futures Spread 1. Assume the margin results of Example 3: -A buy order of 100 eMini S&P Strangles is resting on the book -Working Long = 4800 and Working Short = -12800 Buy 100 eMini S&P Strangles Total Long ---------Total Short 4800 ----------------- -12800 2. An incoming 25-lot order matches. 25 strangles fill and 75 strangles remain. Value A = Put (75 * -280 * 1) + Call (75 * 200 * 1) = -6000 Value B = abs (75 * -280 * 1) + abs (75 * 200 * 1) = 36000 Value C = Value B * Spread Adjustment Factor (36000 * 0.10) = 3600 Determine working long value Since Value A is negative then the working long value is Value C or $3600 Determine working short value Since Value A is negative then working short value is (Value A - Value C) or (-6000 – 3600) or -9600 Calculate Longs: -Call = 25 qty * 200=5000 Calculate Shorts: -Put =25 qty * 280-7000 Total Long = Working Long + Longs - Shorts -Total Long = 3600 + 5000 - 7000 -Total Long = $1600 Total Short = Working Short + Shorts - Longs -Total Short = 9600 + 7000 - 5000 -Total Short = 11600 Buy 75 eMini S&P 500 Strangles Bought 25 Calls Bought 25 Puts Total Long --------- Total Short 1600 --------------- -11600

If Value A is positive then the working long value is Value A + Value C
If Value A is zero or negative then the working long value is Value C

If Value A is negative then the working short value is Value A - Value C
If value A is zero or positive then the working short value is -1 multiplied by Value C

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