You can profit in futures trading when you understand what the spread is and how to make it work for you. An arbitrage technique, the spread is the purchase of one futures contract and the simultaneous sale of a different but related futures contract. The goal of the futures trader is to make money on the change in the price difference between the two contracts.
There are three basic types of spreads:
- Intramarket spread. On the same exchange, in the same commodity, a long position is taken in one contract month balanced by taking a short position in a different contract month.
For example: Buying November corn and selling May corn. - Intermarket spread. Futures contracts are bought on one exchange balanced by the sale of the same contracts on another exchange.
For example: Buying wheat on the Chicago Board of Trade and selling wheat on the Kansas City Board of Trade. - Intercommodity spread. A long position is taken in one commodity, balanced by a short position in a related commodity.
For example: Buying oats and selling corn.
Trading on the spread is considered to be less risky than holding a long or short position. Why? Because you are not trading on changes in the actual prices of the commodity. You are only trading on changes in the price difference.
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