Exchanges are promoting it because it improves volumes, liquidity
Ratio trading and spread betting are the two most popular terms in the commodity futures market as traders educate clients about new strategies in a market that has seen a 40 per cent increase in volumes in the last one year.
“Since the last one year, rising volatility has given trader ample opportunities in both ratio trading and spread betting,” said Ajay Kedia of Kedia Commodities.
Ratio trading takes place when traders feel that investing in a particular pair of commodities – buy on one and sell on another – will give them opportunity to make profit. The pair of commodities where ratio trading is being applied the most are gold-silver, guar seed-guar gum, crude oil-gold, lead-zinc and copper-silver. Traders take a cue from movements in international prices and ratios. Accordingly, they take position in the Indian market.
These strategy involves selling one with buying another. For example, gold-silver ratio refers to the quantity of silver that one can purchase with one ounce of gold. Currently, the gold-silver ratio is at a multi-year low of 1:36.83, indicating that silver has risen much faster then gold. In early August, it was as high as 1:70.88. The sharp movements have drawn large trading interest.
Traders said the recent ratio shows either silver should fall or gold should rise as this level is not sustainable.
Pairing is also considered somewhat safer. “Exchanges promote spread trading and ratio trading as they are hedging tools, reduce volatility and provide liquidity, added Kedia.
Traders would sell silver and buy gold in this ratio. So even if silver doesn’t fall, the ratio level indicates gold could go up further from here.
Similarly, traders in silver-copper ratio would buy copper and sell silver in the ratio of 1:135.61. Again, it indicates the sharp rise in silver. Even gold to crude oil ratio indicates that gold could go up further. On an average, there is a 100 per cent correlation between gold and crude oil. However, in June last, the ratio was 1:17.39 indicating crude oil was undervalued. However, at present, the ratio is 11.91 indicating gold has to rise faster to match the rise in crude oil prices.
| GAINING POPULARITY | ||||||
| Gold/ Silver | Gold/ Crude | Silver/ Copper | Zinc/ Lead | Copper/ Crude | Guar Gum/ Guar Seed | |
| High | 70.88 | 17.39 | 135.61 | 1.11 | 13.70 | 2.95 |
| Low | 4/6/11 36.83 | 4/4/11 11.88 | 2/18/10 70.15 | 3/21/11 0.86 | 4/6/11 10.18 | 4/21/10 1.99 |
| Avg | 58.11 | 14.96 | 90.13 | 0.99 | 12.50 | 2.33 |
| CMP | 36.83 | 11.91 | 135.61 | 0.87 | 10.18 | 2.84 |
| Bloomberg European Dated Brent $/barrel NCDEX Guar Seeds Jodhpur Fut Rs/quintal NCDEX Guar Gum Jodhpur Fut Rs/quintal Compiled by BS Research Bureau | ||||||
Hence gold-silver and gold-crude oil ratios are indicating that gold could go up faster from the current level or won’t fall much.
Spread betting means trading in different maturity contracts of same commodity. This happens when there are wide differences in near month and far month contracts in one commodity.
This had happened in the last month. In May, future contract was at the discount Rs 190 to near month contract. This was used by traders to buy May contract and sell near-month that is, March contract. Since the discounts have fallen since then, traders who bought May contract by selling March made substantial money.
Globally, spread betting is used quite often. In countries like UK, there are tax benefits because, it is used as hedging instrument and helps reducing risks and volatility in the market. In India, the margins are lowers for these strategies.
Indian exchanges also favour spread trading as it means buying one contract while selling another and hence risk and margins are also lower.
