Spread Trading
Spread trading in futures is as old as the hills, yet it is an entirely new concept for most current traders in futures. In this introductory piece, we will show you that spreads can be the most conservative, safest way to trade in the futures markets.
But first, what exactly is a spread?
A Spread Defined
A spread is defined as the sale of one or more futures contracts and the purchase of one or more offsetting futures contracts. You can turn that around to say it the opposite way: “A spread is purchase of one or more futures contracts and the sale of one or more offsetting futures contracts. Either way you say it, it is a spread.
In finance, a spread trade (also known as relative value trade) is the simultaneous purchase of one security and sale of a related security, called legs, as a unit. Spread trades are usually executed with options or futures contracts
as the legs, but other securities are sometimes used. They are executed
to yield an overall net position whose value, called the spread, depends on the difference between the prices of the legs. Common spreads are priced and traded as a unit on futures exchanges rather than as individual legs, thus ensuring simultaneous execution and eliminating the execution risk of one leg executing but the other failing.
Spread trades are executed to attempt to profit from the widening 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 the widening or narrowing of the spread.
Spread Trading Explained
