450
A Complete Guide to the Futures mArket
 ■ As a general rule, traders should avoid trading spreads in markets in which they are unfamiliar 
with the fundamentals.
 ■ Check the open interest of the months involved to ensure adequate liquidity, especially in spreads 
involving distant back months. A lack of liquidity can significantly increase the loss when getting 
out of a spread that has gone awry. At times, of course, a given spread may be sufficiently attrac-
tive despite its less-than-desirable liquidity. 
nevertheless, even in such a case, it is important that 
traders be aware of the extra risk involved.
 ■ place a spread order on a spread basis rather than as two separate outright orders. some traders 
place their spread orders one leg at a time in the hopes of initiating their position at a better price 
than the prevailing market level. 
such an approach is inadvisable not only because it will often 
backfire, but also because it will increase commission costs.
 ■ When the two months of the spread are very close in price, extra care should be taken to specify 
clearly which month is the premium month in the order.
 ■ do not assume that current price quotations accurately reflect actual spread differences. time lags 
in the buying and selling of different contracts, as well as a momentary concentration of orders in 
a given contract month, can often result in outright price quotations implying totally unrepresen-
tative spread values.
 ■ do not liquidate spreads one leg at a time. Failing to liquidate the entire spread position at one 
time is another common and costly error, which has caused many a good spread trade to end in 
a loss.
 ■ Avoid spreads involving soon-to-expire contracts. expiring contracts, aside from usually being 
free of any price limits, are subject to extremely wide and erratic price moves dependent on 
technical delivery conditions.
 ■ do not assume the applicability of prior seasons’ carrying charges before initiating a limited-risk 
spread. Wide price swings and sharply fluctuating interest costs can radically alter carrying costs.
 ■ try to keep informed of any changes in contract specifications, since such changes can substan-
tially alter the behavior of a spread.
 ■ properly implemented intercommodity and intermarket spreads often require an unequal num-
ber of contracts in each market. the methodology for determining the proper contract ratio be-
tween different markets is discussed in the next chapter.
 ■ do not use spreads to protect an outright position that has gone sour—that is, do not initiate an 
opposite direction position in another contract as an alternative to liquidating a losing position. 
in most cases such a move amounts to little more than fooling oneself and often can exacerbate 
the loss.