What is Spread Trading?
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.
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.
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.
A spread is defined as the sale of one or more futures contracts and the purchase of one or more offsetting futures contracts. A spread tracks the difference between the price of whatever it is you are long and whatever it is you are short. Therefore the risk changes from that of price fluctuation to that of the difference between the two sides of the spread. The spreader is a trader who positions himself between the speculator and the hedger. Rather than take the risk of excessive price fluctuation, he assumes the risk in the difference between two different trading months of the same futures, the difference between two related futures contracts in different markets, between an equity and an index, or between two equities. For example, a spreader might take the risk of the difference in price between August Soymeal and December Soymeal (see picture below), or the difference in price between December Kansas City wheat and December Chicago wheat, or between the strongest stock in a sect
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
