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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.