Spreads Scanner

Spreads Scanner

From our previous article, you must be already familiar with the functions and applications of ‘High & Low Breaker’ scanner, as well as how to utilize the scanner for picking out profitable trades. Now, let us take a look at our next scanner – ‘Spreads’.

The Spreads scanner is highly useful in identifying stocks that have an arbitrage potential. The scan results of this Spreads Scanner lists out the stocks that have the highest change in spread between the near month future contract and cash. The results of the scanner are divided into two categories – Long and Short.

Spreads Scanner

 Understanding Spreads

Before interpreting the results of the Spreads Scanner, let us first have a good understanding of the basic concepts behind it.

What is a Spread? A spread (also called as basis) can be loosely defined as the difference between two prices. In this context, a spread is the difference between the Future price of the stock and the Spot price of the stock. Typically, the future price will be greater than the spot price in a normal market.

Example: Consider the example of the stock AxisBank. The stock has a near month future price of 533.80 and a spot price (also known as Underlying value) of 532.10. Hence, the spread for the stock would be Future Bid – Underlying Ask = 1.7spreads_2

What is near, next, and far? Depending on the expiry date, there would be three future contracts available for trading at any point in time. They are the near month, next month, and the far month (after 2 months). The figure below shows the three for AxisBank.

spreads_3-1

Also Read : Resistance and Support.

What is Arbitrage? The process of simultaneously buying as well as selling the same stock in Spot and Future so that profit can be made from the price difference between the two (i.e., spot and future prices) is called as arbitrage. This can be explained using the example of Axis Bank.

Case 1: Arbitrage when spot price is lesser than future price

Assume that Axis Bank has a near month future price of 540 and a spot price of 530. There is a price difference of 10 between the two. Then, the trader will do the following:

  • Buy the underlying (cash)
  • Sell the Futures contract

In order to make profits, the trader will then wait until the price difference becomes less than ₹10 (say, for e.g., when spot price becomes 534 and future price becomes 539).

He would then close the positions – i.e., execute the trades in reverse order ( sell the cash and buy back the future) and thus earn a profit of 5 per share.

Case 2: Arbitrage when spot price is more than future price

Assume that Axis Bank has a near month future price of 545 and a spot price of 555. There is a price difference of 10 between the two. Then, the trader will do the following:

  • Sell the underlying (cash)
  • Buy the Futures contract

The trader will then wait until the price difference becomes less than ₹10.

He would then execute the trades in reverse order ( i.e, buy the underlying and sell the futures contract) and earn a profit.

Note: As the Futures are always traded in lots, the number of shares bought and sold should be equal to the lot size.

Next, let us see the two categories of Spreads Scanner – Long and Short

Spreads Scanner – Long

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The scan results displayed in the ‘Long’ section of the Spreads scanner displays the list of stocks with the highest change in spread between the cash and the future contract.

The stocks listed as the scan results can be used for implementing the strategy of buying in cash and selling in future.

The Long Spreads section is provided with a dropdown with the options to select near, next, or far.

  • On selecting ‘Near’ from the drop-down, the list of stocks displayed would have the highest change in spread between the cash and near month’s future contract
  • On selecting ‘Next’ from the drop-down, the list of stocks displayed would have the highest change in spread between the cash and next month’s future contract
  • On selecting ‘Far’ from the drop-down, the list of stocks displayed would have the highest change in spread between the cash and far month’s future contract

The figure above shows the Spreads Scanner – Long category. The default value of the dropdown is near month.

spreads_5

The results of the scan displayed consists of mainly two values – Change in price with Current Spread; and Initial Spread with % Change.

Example: In the figure, you can see that the stock GAIL has a Change in price of 0.85, Current Spread of 1.5, Initial Spread of 0.65 and % Change of 131%

The change in the long spreads indicates that the future contract of the (near, next, or far) month is in demand.

This provides the opportunity for entering into Arbitrage trading when spread widens on the supposition that it will revert to average spread very soon.

Spreads Scanner – Short

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The scan results displayed in the ‘Short’ section of the Spreads scanner displays the list of stocks with a narrower spread between the cash and the future contract. This means that the difference between spot price and future price will be lesser, with the future price sometime lesser than spot price.

The stocks listed as the scan results can be used for implementing the strategy of buying in future contracts and selling in cash in arbitrage trading. To use this strategy you’d need to own the stocks in cash.

The Short Spreads section is also provided with a dropdown with the options to select near, next, or far. The default value is near month.

The results of the scan displayed consists of mainly two values – Change in price with Current Spread; and Initial Spread with % Change.

 Example: In the figure, you can see that the stock BATAINDIA has a Change in price of 0.80, Current Spread of 1.75, Initial Spread of 0.95 and % Change of 84.21% 

How to use the Spreads scanner results

The result of Spreads scanner can be used for utilizing the arbitrage opportunity, as well as for picking out stocks whose future contracts are in demand.

  • For Long spreads, it indicates an arbitrage opportunity to buy in cash and sell in future
  • For Short Spreads, it indicates an arbitrage opportunity to sell in cash and buy in future

This can also be indicated as shown in table below

Spread Cash    Future Arbitrage Opportunity
        Wide Buya Sellb Long Spread
       Narrow Sellb Buya Short Spread

 Steps to get the list of stocks of ‘Spreads’ Scanner Criteria

 Step #1: Login to Sine App and click on the dropdown icon from Dashboard page.

Step #2: From the drop-down menu displayed, click on ‘Analytics’

Step #3: From the Analytics page, click on ‘Spreads’ scanner.

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Step #4: The results of the scan would be displayed in two tabs – Long and Short – as shown below

spreads_8-1

Also Read : High & Low Breaker Scanner

Functions that can be performed on the Scanner Results list

Various functions can be performed on the scanner results. For doing that, click on any of the stocks of the scan result.  Then the associated functions would be displayed below it. Following functions can be performed on each of the stock that is displayed as the scan result:

  • Add to Watchlist
  • Snap Quote
  • View Chart – includes indicators like CCI, Bollinger Bands. MACD, moving averages, RSI etc.

On clicking on each of those symbols, the corresponding function is executed. The figure below shows the various functions.

spreads_9-1untitledbspreads_10-1

Conclusion

Spreads Scanner lists out stocks with the highest change in spread between the cash and the future contract. Hence, they can be used for utilizing the arbitrage opportunity for making profits from the price difference between spot price and future price.

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