Futures spread trading, another way to trade the market.
Futures spread trading is yet another way to trade the markets.
Spread trading in futures is normally done in commodities such as grain, crude oil, etc or interest rates.
****Please to not confuse it with SPREAD BETTING which is another form of trading where is normally NOT DONE in an exchange but with the quotes that a market maker gives you, essentially in SPREAD TRADING you trade against your market marker.*****
Now, For example in futures spread trading a trader might trade the difference in price between:
- August Corn and December Corn.
- The difference in price between December 30 Year T-Bond and December 10 Year T-Note
- Or between the strongest stock in a sector and the weakest stock in that sector.
Normally futures spread trading happens in related contracts, either by month expiration (August Corn - December Corn) or related instrument with the same expiration date (30-year T-Bond vs 10 year T-Note).
Basically there are 3 types of spread trading in futures
- Calendar spreads:
The trader is long and short in futures of the same market, but in different months such as the corn example above where the trader is Long August Corn and simultaneously Short December Corn.
- Intermarket Spreads:
An Intermarket spread can be accomplished in futures spread trading by going long futures in one market, and short of the same month in another market.
For example: Short December 30 year T-Bond and Long December 10 Year T-Note.
- Inter-Exchange Spreads:
I think this is the less commonly used method of creating spreads. The futures contracts of similar markets are used, but on different exchanges. For example, Crude oil trading in NYMEX and Brent Crude Oil from ICE exchange.
Make money in futures spreading?
If you buy a normal futures contract (outright), the market must go up. If you sell, the market must go down. With a spread trade, you can make money in five different ways.
- If the leg or side you bought goes up relatively higher than the leg (the other futures contract) you sold, you make money.
- If the leg you bought goes up and the leg you sold does nothing, you make money.
- If the leg you bought does nothing and the leg you sold goes down, you make money.
- If the leg you sold goes down relatively lower than the leg you bought, you make money
- And finally if the leg you bought goes up while the leg you sold goes down, you make money.
Now, If the opposite of what is shown above happens, you would lose money, so BE VERY VERY careful my friend.
Advantages of futures spread trading
It offers lower volatility than straight futures and spread trading usually carries lower margin requirements. Spread trading can minimize risk during limit moves in the futures markets. Traders in spread do not care about market direction just a widening or tightening of the futures spread itself.
Well my friend as always be careful with whichever method you use to approach the markets, you could lose LOTS of money just as MAKE it, so planning and discipline is a MUST.
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