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Introduction

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The futures market provides a variety of trading opportunities. In addition to profiting from rising prices by purchasing futures options or from falling prices by selling futures contracts, there is an opportunity to profit from the relationship between different contracts, or spread. A spread refers to the simultaneous purchase and sale of two or more different futures contracts.

When establishing, or "putting on," a spread, a trader looks at the price differential of the spread rather than the absolute contract price levels. The contract that is viewed as "cheap" is purchased (a long position is established). The contract that is viewed as expensive, or "dear," is sold (a short position is established). If market prices move as expected, meaning the long position gains in value relative to the short position, the trader profits from the change in the relationship between the prices.

The concern for a spread trader is the change in the relationship between a long contract and a short one, not the absolute price level of the commodity in question. Of course, just because you are trading a spread does not guarantee or eliminate losses. If the long contract decreases in value relative to the short position, then the spread trader will incur losses.

The key to spread trading is in the relative performance of one futures contract to another. Though some spreads have a basic market bias, known as bull and bear spreads, the absolute price level of the underlying commodity contracts is not important, only the relative performance of one contract versus the other. In other words, a spread trade is a speculation that one contract will out perform another contract.

Available online: Introduction Video to the Spreads Plug-in. Visit us at: http://www.trackntrade.com/tour.htm and select the Spreads video. To view this video you will need a copy of Microsoft's Media Player.