19FOr Beginners Only
Spread
a spread 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. in essence, a spread trader is primarily 
concerned with the difference between prices rather than the direction of price. an example of a spread 
trade would be: Buy 1 July cotton/sell 1 December cotton, July 200 points premium December. 
This order would be executed if July could be bought at a price 200 points or less above the level at 
which December is sold. 
such an order would be placed if the trader expected July cotton to widen 
its premium relative to December cotton.
not all brokerages will accept all the order types in this section (and may offer others not listed here). 
Traders should consult with their brokerage to determine which types of orders are available to them.
 ■ Commissions and Margins
in futures trading, commissions are typically charged on a per-contract basis. in most cases, large 
traders will be able to negotiate a reduced commission rate. although commodity commissions are 
relatively moderate, commission costs can prove substantial for the active trader—an important rea-
son why position trading is preferable unless one has developed a very effective short-term trading 
method.
Futures margins are basically good-faith deposits and represent only a small percentage of the con-
tract value (roughly 5 percent with some significant variability around this level). Futures exchanges 
will set minimum margin requirements for each of their contracts, but many brokerage houses will 
frequently require higher margin deposits. 
since the initial margin represents only a small portion of 
the contract value, traders will be required to provide additional margin funds if the market moves 
against their positions. These additional margin payments are referred to as maintenance.
Many traders tend to be overly concerned with the minimum margin rate charged by a broker-
age house. 
if a trader is adhering to prudent money management principles, the actual margin level 
should be all but irrelevant. as a general rule, the trader should allocate at least three to five times 
the minimum margin requirement to each trade. Trading an account anywhere near the full margin 
allowance greatly increases the chances of experiencing a severe loss. Traders who do not maintain at 
least several multiples of margin requirements in their accounts are clearly overtrading.
 ■ Tax Considerations
 Tax laws change over time, but for the average speculator in the United states, the essential elements 
of the futures contract tax regulations can be summarized in three basic points:
 1. There is no holding period for futures trades (i.e., all trades are treated equally, regardless of the 
length of time a position is held, or whether a position is long or short).