The Complete Guide to Spread Trading – Keith Schap

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The greatest American chess champion’s name is on a book on how to play chess. After explaining the game, he simply teaches you how to kill. Similarly Ross’s Spreads & Seasonals teaches the game simply, and dives straight to the heart of how you can place your first winning seasonal spread trade.

Mr. Schaps textbook is much more complex. It is written for the already active trader, who may want to switch to or try new spreads. Advanced traders, practicing spread traders, mathematicians, and employees of hedge funds and financial firms, will find this book useful. As a result it covers everything, and updates the older spread books into this century. Mr. Schaps works for the CBOT. He does not see a conflict of interest is suggesting that traders rely on brokers for research, I do.

The author explains spreads from the left hemisphere of the brain. Anything that can simply be shown to both sides of the brain in a picture, graph or chart, is instead reduced to a complicated array of digital formulas and intricate equations.

“Spreads … produce better results than outright trades in futures or stocks.”

General principles as well as advanced ideas in the various ways to spread are taught. You do not have to read it straight through, but you can move to the areas that address your current interests. Besides futures, he goes on to cover Option spreads.

“Spreads trade around long term means … they work back towards the mean.”

Instead of using the normal spread charts, where all a trader has to seek is the spread differential to go up. Schaps takes it two levels deeper with exhibits of columns of numbers, formulas, and statistics. If you don’t use arithmetic every day, run far, far away from this book and its complicated mathematical explanations of otherwise simple concepts.

“It is a good idea to focus on the spread as a whole, not on the individual legs of the spread.”

In normal spread teaching, the long contract is stated first the short second. Schap because he is using rows of numbers, has to remind you what is widening and what is narrowing for each type of commodity. You buy the widening or sell the narrowing. Any mix up as to what widening means and you can find yourself on the opposite side of the spread.

“A valid spread must have a structure that ties it to the economic reality you are trying to capture.”

While other writers may use simple charts showing the historical tendency. Schap examples show a much shorter period of only one or two years. Where Schap does use charts, he shows two lines instead of one. Usually he uses exhibits with columns of numbers, as an alternative to charts.

“Price has no history. Only spreads have history.”

Spreads carry messages about how the market needs to draw supplies into and out of storage. “The price differentials of the spreads help the markets to regulate the flow of goods into and out of storage.” A carry (contango) market (price plus storage), wants product to go into storage. An inverted (backwardation) market (penalizes storage), wants product moved out of storage.

Schaps dispenses with the confusing terms of inter and intra delivery, but uses terms like “cointegration,” and “yield curve shift.”

A “Normal yield curve shows a healthy economy, inverted curve, near yield higher than far yield shows slower growth. How it is changing widening or narrowing is the question. When it is widening suggests increasing demand for credit. When the yield curve is narrowing, suggests that the fed is cutting back on the amount of credit it is creating relative to the demand for credit.”

Because spreads isolate the effect of change in the width of the yield curve spread. Yield spreads carry information in advance.

Unlike many spread books that may suggest vague trade dates, for spreads. Schaps has an overview and advanced concepts of spread groups for traders to refer to before making a spread trade in a new commodity. He takes you to deeper layers with the widening, & narrowing. Deeper still the effect it has on storage.

Many spread books have been criticized for using optimized trade dates. Schaps often uses unoptimized exchange expiration dates to exit many of his spreads examples.

Many books may have a chapter about spreads. Only a handful of books are about spread trading. Anyone who takes trading seriously would want to have access to all of the Spread Trading books in his personal library. One successful spread trade could buy the whole lot! In a case like that, Schaps book must be included. ” The Complete Guide,” is not for the beginner or uninitiated trader. As a preview to the experienced mathematician about to trade a new futures group “The Complete Guide to Spread Trading,” by Keith Schap is indispensable.