Friday, December 01, 2006

Spread Trading

A spread is the simultaneous purchase and sale of the same or similar commodity in the same or different contract months. Spread trading is usually considered to be a lower risk strategy than an outright long or short futures position, and therefore margin requirements are usually much less than an outright long or short futures

Just like with any commodity a spread can be bought and sold at "x" price, and it can be charted just like any other market.

You must be asking "How do I make money if I am long and short the same commodity?" The answer is you are hoping to profit from the difference in the two contract months, not from a trend higher or lower in any particular market. With a spread, you follow the relationship, or difference between the contracts, without having to pick a market direction.

Some of the advantages of spreads are:

1. typically require smaller margin deposits
2. underlying market direction isn't important
3. seasonal patterns exist among spreads


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