441
tHe COnCepts And MeCHAniCs OF spreAd trAding 
 3. Spreads often offer some protection against sudden extreme losses due to dra-
matic events that may spark a string of limit-up or limit-down moves counter to 
one’s position (e.g., freeze, large export deal). 
such situations are not all that infrequent, 
and traders can sometimes lose multiples of the maximum loss they intended to allow (i.e., as 
reflected by a protective stop) before they can even liquidate their positions. 
in contrast, during 
a time of successive limit moves, the value of a spread might not even change as both months 
may move the limit. Of course, eventually the spread will also react, but when it does, the 
market may well be past its frenzied panic stage, and the move may be gradual and moderate 
compared with the drastic price change of the outright position.
 4. a knowledge and understanding of spreads can also be a valuable aid in trading 
outright positions. For example, a failure of the near months to gain sufficiently during a 
rally (in those commodities in which a gain can theoretically be expected) may signal the trader 
to be wary of an upward move as a possible technical surge vulnerable to retracement. 
in other 
words, the spread action may suggest that no real tightness exists. this scenario is merely one 
example of how close observation of spreads can offer valuable insights into outright market 
direction. 
naturally, at times, the inferences drawn from spread movements may be mislead-
ing, but overall they are likely to be a valuable aid to the trader. A second way an understanding 
of spreads can aid an outright-position trader is by helping identify the best contract month in 
which to initiate a position. 
the trader with knowledge of spreads should have a distinct advan-
tage in picking the month that offers the best potential versus risk. Over the long run, this factor 
alone could significantly improve trading performance.
 5. trading opportunities may sometimes exist for spreads at a time when none is 
perceived for the outright commodity itself.
 ■ Types of Spreads
there are three basic types of spreads:
 1. the intramarket (or interdelivery) spread is the most common type of spread and con-
sists of buying one month and selling another month in the same commodity. An example of an 
intramarket spread would be long 
december corn/short March corn. the intramarket spread 
is by far the most widely used type of spread and will be the focus of this chapter’s discussion.
the intercrop spread is a special case of the intramarket spread involving two different 
crop years (e.g., long an old crop month and short a new crop month). the intercrop spread 
requires special consideration and extra caution. intercrop spreads can often be highly volatile, 
and price moves in opposite directions by new and old crop months are not particularly uncom-
mon. 
the intercrop spread may often be subject to price ranges and patterns that distinctly 
separate it from the intracrop spread (i.e., standard intramarket spread).
 2. the intercommodity spread consists of a long position in one commodity and a short 
position in a related commodity. in this type of spread the trader feels the price of a given