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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