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training_data/curated/text/aac8bf54235368fe647e0efa7e7089523167a857a4d42bbfedb08af4ed81d988.txt

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+tHe COnCepts And MeCHAniCs OF spreAd trAding 
+shifts.) As a consequence of the intrinsic nature of this commodity, different months in live cattle are, 
+in a sense, different commodities. June live cattle is a very different commodity from december live 
+cattle. the price of each will be dependent on the market’s perception of the supply-demand picture 
+that it expects to prevail at each given time period. it is not unusual for a key cattle on feed report to 
+carry bullish implications for near months and bearish connotations for distant months, or vice versa. 
+in such a case, the futures market can often react by moving in opposite directions for the near and 
+distant contracts. the key point is that in a bullish (bearish) situation, the market will sometimes view 
+the near-term supply/demand balance as being more bullish (bearish) and sometimes it will view the 
+distant situation as being more bullish (bearish). A similar behavioral pattern prevails in hogs. 
+thus, 
+the general rule would not apply in these types of markets.
+in these markets, rather than being concerned about the overall price direction, the spread trader 
+is primarily concerned with how he thinks the market will perceive the fundamental situation in dif-
+ferent time periods. For example, at a given point in time, June cattle and 
+december cattle may be 
+trading at approximately equal levels. if the trader believes that marketings will become heavy in the 
+months preceding the June expiration, placing pressure on that contract, and further believes the 
+market psychology will view the situation as temporary, expecting prices to improve toward year-
+end, he would initiate a long 
+december/short June cattle spread. note that if he is correct in the 
+development of near-term pressure but the market expects even more pronounced weakness as time 
+goes on, the trade will not work even if his expectations for improved prices toward year-end also 
+prove accurate. One must always remember that a spread’s life span is limited to the expiration of the 
+nearer month, and substantiation of the spread idea after that point will be of no benefit to the trader. 
+thus, the trader is critically concerned, not only with the fundamentals themselves, but also with the 
+market’s perception of the fundamentals, which may or may not be the same.
+ ■ Spread Rather Than Outright—An Example
+Frequently, the volatility of a given market may be so extreme that even a one-contract position may 
+represent excessive risk for some traders. 
+in such instances, spreads offer the trader an alternative 
+approach to the market. For example, in early 2014, coffee futures surged dramatically, gaining more 
+than 75 percent from late January to early March, with average daily price volatility more than tri-
+pling during that period. 
+prices swung wildly for the next several months—pushing to a higher high 
+in April, giving back more than half of the rally in the sell-off to the July low , and then rallying to yet 
+another new high in October (see Figure 30.1). At that juncture, assume a low-risk trader believed 
+that prevailing nearest futures prices near $2.22 in mid-October 2014 were unsustainable, but based 
+on the market’s volatility (which was still around three times what it had been early in the year) and his 
+money management rules felt he could not assume the risk of an outright position. 
+such a trader could 
+instead have entered a bear spread (e.g., short July 2015 coffee/long december 2015 coffee) and 
+profited handsomely from the subsequent price slide. Figure 30.1 illustrates the close correspondence 
+between the spread and the market. 
+the fact that an outright position would have garnered a much 
+larger profit is an irrelevant consideration, since the trader’s risk limitations would have prevented him 
+from participating in the bear move altogether had his market view been confined to outright trades.