Spreading Your Way To Futures Gains
Traders approach the markets from many angles but usually confine their analysis to determining whether a market is going up or going down. Spread trading delves into a different realm of price relationship analysis, seeking to extract gains from the change in price difference between two contracts, rather than market direction.
Spreads are basically the simultaneous purchase and sale of two positions, one long and one short, which are taken in the same, or similar commodities. The prices of the two positions tend to move in the same direction where the winnings on one position are offset by losses in the other position. The spread trader profits when there is a change in the difference between the two futures contracts, a price relationship called the basis.
Speculation in spreads is different from trading outright longs or shorts in the sense that a spread trader is indifferent to the changes in the market per se. The spreader is predominately interested in whether the futures contract bought goes up more than the related contract sold (or inversely, goes down less than the contract sold) for profit.
There are many kinds of spreads—