![]() ![]() ![]() Compared to outright futures which can exhibit significant price swings, spreads can demonstrate extended trending price moves making it easier for traders to visualise patterns and thereby take a directional view or implement a technical trading strategy. The main advantages of spread trading are reduced volatility and lower margin requirements as the legs are generally in related markets at the same exchange. Inter-market spread strategies may have legging risk but can be mitigated by using dedicated inter-market spread contracts where available or by selecting liquid underlying contracts for each leg in conjunction using auto-spreading functionality offered by some software vendor trading screens. Inter-market spreads, involve two separate, but related, futures markets with the legs having the same maturity time frames. Given the popularity of these spread trades as well as their contribution to futures rollover activity, dedicated calendar spread markets are available on the CME Direct platform which allows spread execution with no legging risk. Intra-market spreads, also known as calendar spreads are where a trader opens a long or short position in one contract month and then opens an opposite position in another contract month in the same futures market. Spreads may be broadly classified as intra-market spreads and inter-market spreads. These strategies are referred to as relative value strategies. A closer relationship between the spread markets means the individual legs are more likely to move in tandem enabling relatively stable price changes governed primarily by the pace of price moves between the legs (i.e., the relative performance of the legs), thereby reducing the level of risk for the trader. Spread trades may be executed across many markets but traders often look at similar contracts, or related markets, for spread trading opportunities. The profitability of a futures spread trade will depend of the price direction or differences in price movement for the legs of the strategy. The futures spread trade acts as a hedging transaction altering the trader’s exposure from an outright price fluctuation, to the price differential between the individual legs of the spread trade. This is particularly true for precious metals markets, where the underlying commodities demonstrate strong correlations with each other due to close economic links but also distinct fundamental drivers that can create profitable spreading opportunities using the associated futures contracts.Ī spread trade using futures is created by buying a futures contract and simultaneously selling another futures contract against it. ![]() These include capital efficiencies with lower margin outlay and potentially superior risk-adjusted returns. Spread trading is a widely-used trading strategy in futures markets and offer some key advantages over outright futures trading (i.e., going long or short a single futures contract). ![]()
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