What Exactly Are Futures Spreads
Posted By:- Ilan Levy-Mayer Vice President, Cannon Trading Futures Blog
Corn is one of nature’s greatest creations. You can make all sorts of delicious foods from the vegetable. It feeds many different types of animals. It is the base to many different popular types of liquor. Corn also can be an alternative fuel source. Not only are the corn’s uses wondrous it is also a very durable plant. It can take almost any type of weather patterns and still grow. Corn is also popular amongst investors, most notably commodity traders. Although a very good sturdy plant, investing in corn is a risky investment. Actually commodity investing is a risky strategy, but rewarding if you can invest the right way.
To invest in a commodity you have to minimize your risk. Commodities traders will use a strategy known as a futures spread. Future spreads lower the amount of risk because the trader is hedging two commodities contracts, the result is the spread between the prices of the two contracts.
The several types of futures spreads traders can take advantage of.
Calendar spreads are also known as Intramarket spreads. The practice lets the trader take on a short contract and a long contract, both based on specific months of the year. An example would be that the trader buys a contract for soybeans in May, and sells another contract for soybeans in November. To get your results you would simply subtract the November price of soybeans from the May price, and then you get your spread.
Intermarket spreading is the practice of buying a short contract of one commodity and buying the long contract of a different commodity. An example of an intermarket spread; you purchase a short contract of corn and at the same time purchase a long contract of wheat. The difference in the prices of the two will give you the spread.
An Inter-exchange spread is the practice of taking one commodity and spreading their contracts on two different exchanges. An example would be a trader who takes a short contract of wheat on an exchange in Chicago and a long long contract of wheat on an exchange in Kansas City. The difference would give you the spread.
To be a bull in the market place means that you see a long-term price increase ahead. A bull futures spread consists of taking a long position in a nearby or front month and simultaneously taking a short position on a deferred or farther out month.
To be a bear in the market place means that you see a long-term price decrease ahead. A bear futures spread consists of taking a short position in a nearby or front month and simultaneously taking a long position on a deferred or farther out month.
Disclaimer – Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.