Understand Futures Spread

Understand Futures Spread

The futures traders concentrate on a particular asset only. For example, there are some who would trade only on the stock futures, others who focus on the index and still others who would trade on the commodity futures etc. The advanced future traders, however, make use of strategies to trade this market. The future spread is an advanced trading technique and this is where one asset is traded against the other.

You may want to use the spread strategy when trading on the Bitcoin Code software.

Futures spread trade

When a trader trades the futures spread then he simultaneously buys and sells two futures contract in a market that is correlated with each other. So, for example, a spread futures trader would take a long position on one index and a sell position on the other index. The two assets that the traders take a position it has to be highly correlated.

Some examples of futures spread trades are:

  • Long on gold and short on silver
  • Long in euro and short on the US dollar
  • Long on corn and short on wheat futures

There is one buy and one sell position when trading the futures spread contracts. These positions have to be taken at the same time. Each of the assets also known as the leg qualifies to be a future spread trade.

The logic behind taking the futures to spread trade

Why should futures trader take a spread trade in the market?

The markets that are correlated mostly move in a similar direction. However, the speed at which they move varies. In similar assets, the underlying trends could be bullish or bearish but there are factors that do not let both the assets rise or fall at exactly the same rate. As a trader who trades the spread, he should be able to forecast which of the asset will rise or fall faster and then he can capitalize on this difference.

For example, let us consider a trader who has purchased the December gold contract and is selling the December oil contract. The trader makes a profit when the gold prices rise much faster than the price of oil in the same time period. The price of oil does not fall down but the price of oil does not rise as fast as that of gold. So the oil prices would either move slightly up or just sideways and the spread trade still ends up ina profit.

When trading the futures spread, the key thing is for the trader to know which of the two assets will rise or fall faster.