What is Spread Trading?
It involves buying one contract and selling another contract at the same time. The idea is to profit in changes in the price differentials in related commodities (or, in some cases, even the same commodity but in different contract months). It is called “spread trading” because you’re trading the price spread between the two markets and aren’t necessarily concerned with the absolute price level of either market. Source: The Wall Street Journal Guide to Understanding Money & Investing.
It is trading the price difference between either the same commodity of different delivery periods, or two different but related commodities. Examples of the first type – intra-commodity spread: Buying July Beans and Selling November Beans In this example the trader believes that the July price will either go up faster than the November, or that the July will go down slower than the November. Examples of the second type Inter-Commodity spread: Buying the Canadian Dollar and Selling the Swiss Franc The traders doing this believe that the Canadian Dollar will go up faster than the Swiss Franc, or the Canadian will go down slower than the Swiss Franc. For more information click on the education selection and select from the recommended readings. You may want to start with the selections by Lee A. Gaus as they are free booklets and can provide you with a solid foundation.
In Affiliate program, Spreads can significantly reduce the risk in trading compared with straight futures trading. Trading the difference between two contracts in an intramarket spread results in much lower risk to the trader. Spread trades are executed to attempt to profit from the expanding or narrowing of the spread, rather than from movement in the prices of the legs directly. Spreads are either "bought" or "sold" depending on whether the trade will profit from theexpanding or narrowing of the spreads. The volatility of the spread is normally much lower than the unpredictability of the individual legs, since a change in the market fundamentals of a commodity will tend to affect both legs similarly. The margin requirement for a futures spread trade is therefore typically less than the sum of the margin necessities for the two individual futures contracts, and sometimes even less than the requirement for one agreement.
Next to options trading, spread trading can be one of the most potentially confusing areas of finance. However, the essence of it is fairly simple. Spread trading means buying a futures contract or other type of security and selling another related one in order to profit from the price difference, or “spread” between the two. This is often done to take advantage of predictable seasonal changes in the price of certain commodities. Investors who use the spread trading technique may study historical or technical factors in determining when and how to place trades and where prices are likely to go. Spread trading falls into three basic categories, the first one being intramarket spreads. This is the simplest type of spread trade and involves buying and selling the same commodity, but for different months. For example, an investor might buy July wheat and sell December wheat. Intermarket spreads are a second type in which different commodities are traded for the same month. An example of th
Spread trading can mean several things. Using futures contracts to speculate on movements of two assets is speculative spread trading. A hedge fund that bets on the narrowing of the spread between corporate bonds and Treasuries would buy futures on corporate bonds (hoping for falling corporate rates) and sell futures on the Treasuries (hoping for rising Treasury rates). If the spread narrows as anticipated, both contracts make a profit due to the inverse relationship between bond prices and interest rates. Spread trading can also be used to trade on anticipated trends. An investor anticipating a rise in a stock price may buy a call option with an exercise price closer to being in-the-money and sell a call option with an exercise price further out-of-the-money. (Both calls are on the same stock and have the same expiration date.) The premium received on the option sold is used to offset the premium paid on the option bought. Hopefully, the stock price will rise enough to exercise the op
