08 April 2010
CME Group: Inter-Market Stock Index Spreads
Stock index futures are useful trading tools because they provide a proxy for taking on a position in a particular national stock market or stock market sector. Placing an inter-market spread between two stock index futures representing different national stock markets or sectors is an effective and facile way of expressing an opinion regarding the prospective relative performance of those two markets.
For example, if one believed that the high-tech sector of the U.S. stock market might outperform the market in general, one might place an intermarket spread by buying Nasdaq-100 futures and selling S&P 500 futures. Or, if one believed that the Korean economy and by implication its stock market would outperform the U.S. economy and its stock market, one might buy Kospi-200 futures and sell S&P 500 futures. This is facilitated by today’s modern electronic trading systems that allow market participants to operate virtually around the clock, taking positions in American, Asian or European markets with ease.
The purpose of this piece is to review the process and practice of inter-market stock index spreading. Accordingly, we will review some useful strategies and indicators of possible opportunity in the U.S., Asian and European stock index markets.
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