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tHe COnCepts And MeCHAniCs OF spreAd trAding 
 ■ The General Rule
For many commodities, the intramarket spread can often, but not always, be used as a proxy for an 
outright long or short position. As a general rule, near months will gain ground relative to distant 
months in a bull market and lose ground in a bear market. 
the reason for this behavior is that a bull 
market usually reflects a current tight supply situation and often will place a premium on more imme-
diately available supplies. 
in a bear market, however, supplies are usually burdensome, and distant 
months will have more value because they implicitly reflect the cost involved in storing the com-
modity for a period of time. 
thus, if a trader expects a major bull move, he can often buy a nearby 
month and sell a more distant month. if he is correct in his analysis of the market and a bull move 
does materialize, the nearby contract will likely gain on the distant contract, resulting in a success-
ful trade. 
it is critical to keep in mind that this general rule is just that, and is meant only as a rough 
guideline. there are a number of commodities for which this rule does not apply, and even in those 
commodities where it does apply, there are important exceptions. W e will elaborate on the question 
of applicability in the next section.
At this point the question might legitimately be posed, “
if the success of a given spread trade is 
contingent upon forecasting the direction of the market, wouldn’t the trader be better off with an 
outright position?” Admittedly, the potential of an outright position will almost invariably be consid-
erably greater. But the point to be kept in mind is that an outright position also entails a correspond-
ingly greater risk. 
sometimes the outright position will offer a better reward/risk ratio; at other 
times the spread will offer a more attractive trade. A determination of which is the better approach 
will depend upon absolute price levels, prevailing price differences, and the trader’s subjective views 
of the risk and potential involved in each approach.
 ■ The General Rule—Applicability and Nonapplicability
Commodities to Which the General rule Can Be applied
Commodities to which the general rule applies with some regularity include corn, wheat, oats, 
soybeans, soybean meal, soybean oil, lumber, sugar, cocoa, cotton, orange juice, copper, and heating 
oil. (
the general rule will also usually apply to interest rate markets.) Although the general rule will 
usually hold in these markets, there are still important exceptions, some of which include:
 1. At a given point in time the premium of a nearby month may already be excessively wide, and 
consequently a general price rise in the market may fail to widen the spread further.
 2. s ince higher prices also increase carrying costs (see section entitled “the Limited-risk spread”), 
it is theoretically possible for a price increase to widen the discount of nearby months in a 
surplus market. Although such a spread response to higher prices is atypical, its probability of 
occurrence will increase in a high-interest-rate environment.