What Makes A Trade A Spread? A spread consists of two or more related futures positions. Note the word "related" here. In order for a spread to be recognized for margin purposes—more on that in a moment—there has to be an economic connection between its constituents. Plainly, gold and silver are fellow-traveling precious metals, but formal recognition of the spread by the exchange clearinghouse is required to derive the spread's benefits.
What benefits? Well, in most cases, reduced margin requirements.
Let's look at how this facilitates a gold/silver ratio trade.
COMEX gold is traded in 100-ounce contracts, which require a minimum performance bond (or margin deposit) of $5,739 each. COMEX silver's $6,750 margin requirement is based upon a 5,000-ounce contract.
If you think the gold/silver ratio will move in the white metal's favor, then you might be inclined to buy silver. By purchasing silver outright, however, you're only going to make money if prices advance above your buy point. In contrast, selling gold against a silver purchase wagers on an improvement in silver's buying power, whether it derives from a rise in silver's price or a decline in gold's. A spread, therefore, gives you greater flexibility. (more)
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