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Futures Spreads

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Futures Spreads

When a trader enters into a position whether long (buy) or short (sell) in the futures market, it is considered to be trading futures outright.

On the other hand, if a trader or investor enters into a long and short position of the futures contract at the same time, it is considered to be trading futures spreads.

The spread is created when a futures contract of the opposite direction is added into the existing position when the order is placed at the same time.

When you enter into a futures spread, you are taking the risk of the price difference between long and short futures contract as opposed to the just taking the risk of one direction whether it’s bullish or bearish.

In this way, besides a speculating the price difference, you are also entering into a position of a
hedger.

Futures Spread Example

Assuming FCPO is at 3600 and its June 2011 futures contract is asking for 3550 and its December 2011 contract is asking for 3500.

Assuming you are expecting a bullish trend on FCPO, thus you enter into a spread by simultaneously going a long position of June 2011, and a short position of Dec 2011.

Advantages of Futures Spreads

By using spreads, you increase the chance of probability of profiting from the futures market.

It allows producers to hedge their production price movement risks.

It allows for profits allows for profits even if the price of the underlying security or commodity remains unchanged.

The margin requirement of futures spreads is lower thus increasing your return of investment.

Disadvantages of Futures Spreads

By entering more contracts, there are more commission charges.

Spreads will not make an explosive profit, or an exceptional gain during the price jump or gap in prices compared to if you enter into an outright futures position.

Types of Spreads

There are three categories of spread which are Intramarket Spread, Intermarket Spread and Interexchange Spread.

Intramarket Spread

These are future spreads using the same underlying asset but different expiration months.

Intermarket Spreads

These are spreads of using different underlying assets of futures contracts but related assets. For example, common Intermarket Spreads are Gold/Silver, Soybean/Corn, Wheat/Corn, Soybean/Soybean Meal and Crude Oil/Heating Oil.

Interexchange Spreads

These are spreads consisting of futures contracts of the same underlying asset but traded in different exchanges. One advantage is that different exchanges may have better prices in another exchange.

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