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+A Complete Guide to the Futures mArket
+ ■ Spreads—Definition and Basic Concepts
+A spread trade involves the simultaneous purchase of one futures contract against the sale of another 
+futures contract either in the same market or in a related market. normally, the spread trader will 
+initiate a position when he considers the price difference between two futures contracts to be out of 
+line rather than when he believes the absolute price level to be too high or too low . 
+in essence, the 
+spread trader is more concerned with the difference between prices than the direction of price. For 
+example, if a trader buys October cattle and sells February cattle, it would not make any difference to 
+him whether October rose by 500 points and February by only 400 points or October fell by 400 and 
+February fell by 500. 
+in either case, October would have gained 100 points relative to February, and 
+the trader’s profit would be completely independent of the overall market direction.
+However, this is not to say the spread trader will initiate a trade without having some definitive 
+bias as to the future outright market direction. in fact, very often the direction of the market will 
+determine the movement of the spread. in some instances, however, a spread trader may enter a posi-
+tion when he has absolutely no bias regarding future market direction but views a given price differ-
+ence as being so extreme that he believes the trade will work, or at worst allow only a modest loss, 
+regardless of market direction. W e will elaborate on the questions of when and how market direction 
+will affect spreads in later sections.
+ ■ Why Trade Spreads?
+the following are some advantages to not exclusively restricting one’s trading to outright positions:
+ 1. In highly volatile markets, the minimum outright commitment of one contract 
+may offer excessive risk to small traders. 
+in such markets, one-day price swings in excess 
+of $1,500 per contract are not uncommon, and holding a one-contract position may well be 
+overtrading for many traders. 
+ironically, it is usually these highly volatile markets that provide 
+the best potential trading opportunities. spreads offer a great flexibility in reducing risk to 
+a desirable and manageable level, since a spread trade usually presents only a fraction of the 
+risk involved in an outright position.
+1 For example, assume a given spread is judged to involve 
+approximately one-fifth the risk of an outright position. in such a case, traders for whom a one-
+contract outright position involves excessive risk may instead choose to initiate a one-, two-, 
+three-, or four-contract spread position, depending on their desired risk level and objectives.
+ 2. there are times when spreads may offer better reward/risk ratios than outright 
+positions. Of course, the determination of a reward/risk ratio is a subjective matter. never-
+theless, given a trader’s market bias, in a given situation spreads may sometimes offer a better 
+means of approaching the market.
+1 For some markets, reduced-size contracts are available on one or more exchanges.