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+tHe COnCepts And MeCHAniCs OF spreAd trAding 
+ ■ The General Rule
+For many commodities, the intramarket spread can often, but not always, be used as a proxy for an 
+outright long or short position. As a general rule, near months will gain ground relative to distant 
+months in a bull market and lose ground in a bear market. 
+the reason for this behavior is that a bull 
+market usually reflects a current tight supply situation and often will place a premium on more imme-
+diately available supplies. 
+in a bear market, however, supplies are usually burdensome, and distant 
+months will have more value because they implicitly reflect the cost involved in storing the com-
+modity for a period of time. 
+thus, if a trader expects a major bull move, he can often buy a nearby 
+month and sell a more distant month. if he is correct in his analysis of the market and a bull move 
+does materialize, the nearby contract will likely gain on the distant contract, resulting in a success-
+ful trade. 
+it is critical to keep in mind that this general rule is just that, and is meant only as a rough 
+guideline. there are a number of commodities for which this rule does not apply, and even in those 
+commodities where it does apply, there are important exceptions. W e will elaborate on the question 
+of applicability in the next section.
+At this point the question might legitimately be posed, “
+if the success of a given spread trade is 
+contingent upon forecasting the direction of the market, wouldn’t the trader be better off with an 
+outright position?” Admittedly, the potential of an outright position will almost invariably be consid-
+erably greater. But the point to be kept in mind is that an outright position also entails a correspond-
+ingly greater risk. 
+sometimes the outright position will offer a better reward/risk ratio; at other 
+times the spread will offer a more attractive trade. A determination of which is the better approach 
+will depend upon absolute price levels, prevailing price differences, and the trader’s subjective views 
+of the risk and potential involved in each approach.
+ ■ The General Rule—Applicability and Nonapplicability
+Commodities to Which the General rule Can Be applied
+Commodities to which the general rule applies with some regularity include corn, wheat, oats, 
+soybeans, soybean meal, soybean oil, lumber, sugar, cocoa, cotton, orange juice, copper, and heating 
+oil. (
+the general rule will also usually apply to interest rate markets.) Although the general rule will 
+usually hold in these markets, there are still important exceptions, some of which include:
+ 1. At a given point in time the premium of a nearby month may already be excessively wide, and 
+consequently a general price rise in the market may fail to widen the spread further.
+ 2. s ince higher prices also increase carrying costs (see section entitled “the Limited-risk spread”), 
+it is theoretically possible for a price increase to widen the discount of nearby months in a 
+surplus market. Although such a spread response to higher prices is atypical, its probability of 
+occurrence will increase in a high-interest-rate environment.