Futures Investing Strategies

Written by Jacey Harmon
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The term spread carries two different meanings in the market. Spread can mean the difference between the bid and the asking price. For example, if the bid is $10 and the ask is $11, the spread would be $1. The spread is how market makers make money on trades. It is also known as slippage in the futures market.

Spreads as Futures Trading Strategies

Spread can also pertain to a specific trading strategy. Spreading is a way to hedge your risk against adverse market movements. Hedging is basically a way to reduce your risk on a specific trade. A side effect of hedging is it also reduces your potential for profit. Risk and reward are directly correlated in the investment markets.

The basics of a spread revolve around "long" and "short" trades and contract expirations. A long trade is when you buy a contract in expectation that its value will rise. A short trade is when you sell a contract in expectation that its value will fall. Each contract has an expiration date. The current or closest contract expiration is called the "near" contract. The "far" contract would be the next month's expiration. A May contract would be the near while a June contract would be the far.

Bull spreads are a long spread as it is a winning trade if the market rises. In a bull spread you buy the near contract and sell the far contract. Bear spreads are the opposite of bull spreads and make money when the market falls. In a bear spread you sell the near contract and buy the far. An interdelivery spread is when you purchase one given delivery month and sell another delivery month of the same commodity on the same exchange. Intermarket spread is when you sell a delivery month of a contract on one exchange and purchase the same delivery month of the same contract on a different exchange. A crush spread is when you purchase soybean futures with the simultaneous sale of soybean oil and meal futures.


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