Spreads

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Spreads (or "spread trading") refer to market trades that try to exploit the difference ("spread") between bid and ask prices of an asset or commodity. Spread traders take a simultaneous long and short position in an attempt to profit.

Spreads are often done on derivatives markets as futures or options. On commodities markets they are called straddles and usually refer to trading the price difference between two different futures contracts in that commodity.[1] Spread trades are long/short futures positions that give traders exposure to that spread.[2]

To trade option spreads, traders typically use pairs of options that either have the same maturity but different underliers (intracommodity spreads) or the same underlier but different maturities (intercommodity or calendar spreads). Commonly-employed intracommodity strategies are the back spread and the ratio spread, both of which use differing strike prices. Energy traders use the crack spread to trade the price of crude versus refined oil.

A calendar spread is an options or futures spread established by simultaneously entering a long and short position on the same underlying asset but with different delivery months.[3]

References

  1. Commodity Spreads. Keystone Marketing Services.
  2. Futures Spreads. RiskGlossary.com.
  3. Calendar Spread. Investopedia.