Among the multitude of tools available on Zerodha Trader an important one especially for people who run strategies which require placing multiple orders at a time is “Spread Orders”, I’ll explain on why and how to use Spread orders in the following blog.
First thing to know is how to open the Spread Order window and how to monitor your orders as spread orders placed won’t show in your normal order book.
Spread Order window: Ctrl+ Shift + F1
Spread Order report: Window to monitor the orders placed, cancel/modify spread orders, see the picture below.
Once clicked on Spread Order the following window shows up; do note the 3 different order types in the pic below:
Will explain taking examples for all the different order types mentiond in the above picture
1. Order Type, SP (Spread):
SP order type is used for taking a calendar spread position. A calendar spread is a contract where you buy/sell a particular month contract (Futures or Options) and sell/buy (take an opposite position) of the same contract of a different month. Why would someone want to do such a trade???
Assume that you see Nifty February futures trading at 5900 and March futures trading at 5960, you feel that this difference of 60 points between both the months is quite a bit and this will reduce to 30 points in the next few days, how do you profit from this idea? The idea is to profit without taking any naked directional risk, i.e., immaterial of the market going up or down, you should be able to profit if this difference between both the futures reduces from 60 to 30 points.
The easiest way to do this is to sell March futures at 5960 and buy February futures at 5900 in 2 different orders and when the difference is lesser than 60 you make profits, and if the difference is more than 60 you make losses. In a position like this there is hardly any market risk and because of this the margin requirement to setup a calendar spread like this as per exchange norms will be very less. Just to give you an example, the margin required for 1 lot of Nifty is around Rs. 28000, so in the above case since you have 2 lots the margin requirement should ideally be Rs. 56000.
But becaue this is a calendar spread the margin requirement for both the positions together due to the reduced risk is only Rs. 6000 and not Rs. 56000. You can check the SPAN Calculator to see this benefit.
The issue with entering a calendar spread in 2 different orders like above is that (a) There is a risk that the price moves between placing both the orders (b) you would have to pay brokerage for 2 orders to enter and 2 to exit (not that we would mind). By using the SP order type in the spread order window, all the above 2 issues get fixed.
*Imp: Do note that while placing the spread order like above you will need margin on one side of the future completely, but as soon as you take the position the margin drops. For eg to take a spread position of buy 1 lot feb nifty and sell 1 lot of March nifty, you will need around 30k to place the order. But as soon as the order is executed, the margin required drops to around Rs6000.
To track the exact difference between 2 calendar future contracts, NSE gives you a specific quote which can also be traded directly. To track this see the picture below:
Here are the tricky few bits: this difference which is shown on the spread contract can be positive, negative, or zero, which is not possible for all other contracts other than spread contracts. So if October Nifty is at 6200 and November Nifty at 6190, this spread contract in the above figure will be -10.
Here is where I’d ask all traders to exercise caution, as trading the spread differs from trading an underlying. Though you are actually buying the spread you are actually selling the spread contract and hence you can see a red window even though it is a buy order (ideally it should be blue). In the above example, if I put the price as Rs. 20 the spread will get created at the market price and if I put say Rs. 60, it will go as pending as shown below.
Spread order report is under the Orders and Trades menu and the link to the menu is shown on the first pic of this blog.
So if you think that a spread is going up you will use the buy order window, buy it at 30 and sell it when it reaches 35, or similarly if you think it is coming down you sell at 30 and buy it back when it comes to 25. These spread contracts are not very liquid contracts so exercise caution when setting them up.
When you trade using the Spread Order window the margin benefit is instant. So if you have around 6k in your account you can take a position in 1 lot of the above contract.
2. Order type : 2L/3L
These order types on the Spead Order window can be used for some of these reasons.
Do note that all orders placed using 2L/3L are IOC orders, what this means is that if the quantity that you specify at the rate is not available it gets cancelled immediately. Will explain in detail further…
a. Rolling over position:
You have bought Nifty February Futures and today is the last day of expiry, you intend to rollover the position to the next month, how do you do it?
You will first place a Nifty sell February future and once executed buy the Nifty March future. What is the risk with this?
What if as soon as you sold the Nifty February future, the market bounced and you lost a lot of points before you could buy the March future??
You can use the 2L order type to ensure that this doesn’t happen as shown below…
b. Pair Trading:
In this kind of trading you are entering 2 different contracts at a same time with an idea to profit from some correlation between them. For example, you feel that the market will go down but the banking index will hold stronger. Basically, you would have to short Nifty futures and buy Banknifty futures and since both the contract values are around the same, you can sell 1 lot of Nifty and buy 1 lot of Banknifty at the same time using the same 2L order type above.
There are other similar strategies for which the Spread Order is useful. But do note that for both 2L and 3L strategies the validity type is only IOC and hence there is no question of pending orders in the Spread Order Report.
3Lorder type on spread orders is usually used for option strategies that involve taking 3 positions at one time. For example:
Collar: Buy Stock/Future, Buy a Put , Sell a Call
Butterfly: Buy 1 in-the-money (ITM) Call, Sell 2 out-of-the-money (OTM) Calls, Buy 1 deep out of the money Call (long butterfly spread with calls, there are many variations to the butterfly)
For the above strategies and many more such ones, it is important that all 3 positions have to be entered at the same time or else there is a risk that one order gets executed and the other goes pending, if such a thing happens the whole strategy can be flawed.
You can use the 3L order type and place all the three legs of the strategy at one time mentioning the price. The order will get executed only if all the 3 are guaranteed executions based on the price you have mentioned, if not all the 3 orders get cancelled.
Spread Orders are an important tool for people taking multiple positions at a same time, you could use Basket Orders for the same where we let you place orders from an excel sheet.
With a basket order you can place as many orders at one time as you want, whereas the maximum number of orders on a spread order window is only three.
Advantage of spread orders (2L/3L) is that they are executed only if all the legs are guaranteed executions, which is not available for basket orders.