698 Part V: Index Options and Futures 
The spreader is not attempting to predict the overall direction of prices. Rather, 
he is trying to predict the differential in prices between the July and September con­
tracts. He doesn't care if beans go up or down, as long as the spread between July and 
September goes his way. 
Example: A spread trader notices that historic price charts show that if September 
soybeans get too expensive with respect to July soybeans, the differential usually dis­
appears in a month or two. The opportunity for establishing this trade usually occurs 
early in the year - February or March. 
Assume it is February 1st, and the following prices exist: 
July soybean futures: 600 ($6.00/bushel) 
September soybean futures: 606 
The price differential is 6 cents. It rarely gets worse than 12 cents, and often revers­
es to the point that July futures are more expensive than soybean futures - some 
years as much as 100 cents more expensive. 
If one were to trade this spread from a historical perspective, he would thus be 
risking approximately 6 cents, with possibilities of making over 100 cents. That is 
certainly a good risk/reward ratio, if historic price patterns hold up in the current 
environment. 
Suppose that one establishes the spread: 
Buy one July future @ 600 
Sell one September future @ 606 
At some later date, the following prices and, hence, profits and losses, exist. 
Futures Price 
July: 650 
September: 630 
Total Profit: 
Profit/Loss 
+50 cents 
-24 cents 
26 cents ($1,300) 
The spread has inverted, going from an initial state in which September was 6 
cents more expensive than July, to a situation in which July is 20 cents more expen­
sive. The spreader would thus make 26 cents, or $1,300, since 1 cent in beans is 
worth $50.