Saturday, November 16, 2013

Profit Potential with Spread Trading

The futures markets are attractive to investors due to the wide range of products offered; from grain futures, to metals, to energies and financials, there are numerous products that offer opportunity.  The wide spectrum of products listed and their time-specific nature also allow traders to structure trades that capitalize on the difference between two or more commodities, or their different price expectations over time.   These types of trades, called spreads, add a layer of complexity, but expand investors' opportunities and can be quite profitable.  In this article, we will explore some basic types of spreads and other factors to consider when executing these trades.
At its basic level, a spread trade involves the buying of one or more contracts of one future, and selling one or more contracts of another. Traders hope to profit by a change in the relative difference between the two futures contracts.  If the difference becomes larger, the spread is said to be widening, and if the difference becomes smaller, the spread is said to be tightening.  Spread trades are often traded from a fundamental basis or belief, although they can be traded through technical analysis as well.  There are many types of spread trades, which include seasonal spreads, financial spreads, inter-commodity spreads, and crack/crush spreads. (more)

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