RV Trading

𝗖𝗮𝗻 𝗬𝗼𝘂 𝗛𝗲𝗱𝗴𝗲 𝗙𝗿𝗼𝗺 𝗮 𝗦𝗽𝗲𝗰𝘂𝗹𝗮𝘁𝗶𝘃𝗲 𝗦𝘁𝗮𝗻𝗱𝗽𝗼𝗶𝗻𝘁?

Hedging is often viewed as a pure risk management tool—something used by companies looking to avoid outright price exposure. But can speculators hedge too?

✅ 𝗘𝗻𝘁𝗲𝗿 𝗥𝗲𝗹𝗮𝘁𝗶𝘃𝗲 𝗩𝗮𝗹𝘂𝗲 (𝗥𝗩) 𝗧𝗿𝗮𝗱𝗶𝗻𝗴.

Instead of betting on the absolute price movement of a single commodity, RV traders focus on the relationship between two related commodities.

Take 𝗹𝗲𝗮𝗱 𝗮𝗻𝗱 𝘇𝗶𝗻𝗰, for example:
🔹 Zinc 3M: $2,900/mt
🔹 Lead 3M: $2,000/mt
👉 The spread = $900/mt

Rather than simply going long or short one metal, an RV trader might:
📉 𝗦𝗲𝗹𝗹 𝘇𝗶𝗻𝗰 & 𝗯𝘂𝘆 𝗹𝗲𝗮𝗱 → if they expect the spread to narrow
📈 𝗕𝘂𝘆 𝘇𝗶𝗻𝗰 & 𝘀𝗲𝗹𝗹 𝗹𝗲𝗮𝗱 → if they expect the spread to widen

🔍 𝗘𝘅𝗮𝗺𝗽𝗹𝗲:
If the spread starts at $900/mt but later expands to $1,000/mt with a zinc price of $3,100/mt and a lead price of $2,100/mt, a trader who bet on a narrowing spread would take a $100/mt loss. But if they had only shorted zinc, their loss would have been $200/mt—demonstrating how RV trading can reduce outright risk.

💡 𝗪𝗵𝘆 𝗱𝗼𝗲𝘀 𝘁𝗵𝗶𝘀 𝗺𝗮𝘁𝘁𝗲𝗿?
Relative Value trading is common across the commodities space—from base metals to energy and even the widely discussed 𝗴𝗼𝗹𝗱-𝘁𝗼-𝗼𝗶𝗹 𝗿𝗮𝘁𝗶𝗼. While this trade limits upside potential, it also reduces downside risk, making it a key tool for risk-adjusted returns in a diversified portfolio.