Spread Trading Market Relationships

| May 24, 2011

If you’re only investing in stocks, you’re making a huge mistake.

Right now, some of the best money making opportunities are flying under the radar.  But in order to take advantage of them, you have to think outside the box.

Now more than ever, the macro picture is driving asset price movements. Stocks, bonds, currencies, and commodities are all related.  And exploiting these relationships is a great way to make money.

Sophisticated investors and hedge funds consistently profit from these market relationships.  The strategy is called spread trading.  And now it’s easier than ever for you to get in on the action.  I’ll tell how in a minute…

First, let’s take a closer look at spread trading.

A spread trade is simply profiting from the widening or narrowing of the spread between two different assets.  This is different than profiting from the movement in the prices independently.

In other words, spread trading is capturing the price difference between two assets.

For instance, right now everyone is talking about the relationship between the US Dollar and the S&P 500.  Over the last year, the US Dollar trended lower while the S&P 500 trended higher.

Traders who identified this relationship were able to make money off the widening spread between these two assets.

And there are plenty of other, less talked about, relationships too.

These relationships are always changing.  And this price volatility provides you with numerous trading opportunities.

Now, here’s the best part…

Spread trades tend to trend more dramatically and consistently than other trades.

For these and many other reasons, professionals are quietly using spread trades to generate profits in any market environment.

Typically, spread trades are executed with derivatives.  Traders use tools like futures and options to take a bullish and a bearish position on different assets at the same time.

But here’s the problem…

Most investors don’t understand options or futures… They don’t want to understand them… And they don’t want to mess them… As a result, spread trading flies under the radar and doesn’t get much attention.

Now, there’s an easier way spread trade.

You don’t have to understand futures or options or even have an advanced math degree to make these trades.  Now you can spread trade with a single Exchange Traded Fund (ETF) from FactorShares.

FactorShares make it cheap and easy to trade a long/short index strategy.

For instance, FactorShares 2X: S&P 500 Bull/USD Bear (FSU) profits when stocks in the S&P 500 are going up and the US Dollar is falling (sound familiar?).  And FSU even uses leverage to double the daily return.

FactorShares offers 2X leveraged spread trading on four other pairs as well.

FSA pairs T Bond Bull with S&P 500 Bears… FOL pairs Oil Bulls with S&P 500 Bears… FSG pairs Gold Bulls with S&P 500 Bears… And FSE pairs S&P 500 Bulls with T Bond Bears…

Plus, I’m betting we’ll see more combinations if these spread trade ETFs catch on…

I’ve got to admit these ETFs sound pretty amazing.

However, a word of caution… FactorShares ETFs only began trading in February.  So they have a limited history and trading volume is still weak.

The good news is… so far the results are impressive!

For example, FSU was rocketing higher when the weak dollar/strong stock market trend was in full swing.  From March 16th to May 2nd, the S&P 500 shot up 10%.  But over the same time, FSU surged 32%!  Those are big gains any way you slice them…

Clearly, spread trading can deliver big profits.

And now investors have an easy way to do it with FactorShares’ new family of ETFs.

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Category: ETFs

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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