A note on net and double gains, or losses, in spreading operations
✍ Scribed by P. Laborde
- Publisher
- John Wiley and Sons
- Year
- 1982
- Tongue
- English
- Weight
- 204 KB
- Volume
- 2
- Category
- Article
- ISSN
- 0270-7314
No coin nor oath required. For personal study only.
✦ Synopsis
Note on Net and Double Gains, or Losses, in
Spreading Operations
P. Laborde
n certain two-sided spreading operations there occur double gains when the I spread expectation holds; that is, a gain in each one of the component legs of the spreading diagram, instead of a net gain from a gains and a losses leg. When the spread expectation does not hold, one may also experience a double loss.
Let us recall the trading rules so as to obtain a gain from spreads (intra-or interspreads) under equal spread signs at open and offset.
Open buying the higher-priced leg and selling the lower-priced leg. Offset legs with opposite to open trades-spread expectation: widen.
Open buying the lower-priced leg and selling the higher-priced leg. Offset legs with opposite to open trades-spread expectation: narrow.
Upon operating according to the above rules and if the spread expectation materializes we obtain at least a net gain from both legs; however, we may obtain gains from each leg. If our expectation does not materialize, we obtain a net loss or losses from each leg.
PART A E v a l Spread Signs at Open and Offset
In this part of the article we consider the spread signs at open and offset positions to be equal. It may have happened that during the life of the spread the spread sign has not changed at all, or changed an even number of times, corresponding to the number of times the two price curves have intersected. As long as the restriction of equal signs holds, we operate for gains with the rules given above.
Definition 1: A widening spread implies that the absolute value of the spread increases from open to offset, and a narrowing spread implies that the absolute value decreases from open to offset.