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tHe COnCepts And MeCHAniCs OF spreAd trAding 
shifts.) As a consequence of the intrinsic nature of this commodity, different months in live cattle are, 
in a sense, different commodities. June live cattle is a very different commodity from december live 
cattle. the price of each will be dependent on the market’s perception of the supply-demand picture 
that it expects to prevail at each given time period. it is not unusual for a key cattle on feed report to 
carry bullish implications for near months and bearish connotations for distant months, or vice versa. 
in such a case, the futures market can often react by moving in opposite directions for the near and 
distant contracts. the key point is that in a bullish (bearish) situation, the market will sometimes view 
the near-term supply/demand balance as being more bullish (bearish) and sometimes it will view the 
distant situation as being more bullish (bearish). A similar behavioral pattern prevails in hogs. 
thus, 
the general rule would not apply in these types of markets.
in these markets, rather than being concerned about the overall price direction, the spread trader 
is primarily concerned with how he thinks the market will perceive the fundamental situation in dif-
ferent time periods. For example, at a given point in time, June cattle and 
december cattle may be 
trading at approximately equal levels. if the trader believes that marketings will become heavy in the 
months preceding the June expiration, placing pressure on that contract, and further believes the 
market psychology will view the situation as temporary, expecting prices to improve toward year-
end, he would initiate a long 
december/short June cattle spread. note that if he is correct in the 
development of near-term pressure but the market expects even more pronounced weakness as time 
goes on, the trade will not work even if his expectations for improved prices toward year-end also 
prove accurate. One must always remember that a spread’s life span is limited to the expiration of the 
nearer month, and substantiation of the spread idea after that point will be of no benefit to the trader. 
thus, the trader is critically concerned, not only with the fundamentals themselves, but also with the 
market’s perception of the fundamentals, which may or may not be the same.
 ■ Spread Rather Than Outright—An Example
Frequently, the volatility of a given market may be so extreme that even a one-contract position may 
represent excessive risk for some traders. 
in such instances, spreads offer the trader an alternative 
approach to the market. For example, in early 2014, coffee futures surged dramatically, gaining more 
than 75 percent from late January to early March, with average daily price volatility more than tri-
pling during that period. 
prices swung wildly for the next several months—pushing to a higher high 
in April, giving back more than half of the rally in the sell-off to the July low , and then rallying to yet 
another new high in October (see Figure 30.1). At that juncture, assume a low-risk trader believed 
that prevailing nearest futures prices near $2.22 in mid-October 2014 were unsustainable, but based 
on the market’s volatility (which was still around three times what it had been early in the year) and his 
money management rules felt he could not assume the risk of an outright position. 
such a trader could 
instead have entered a bear spread (e.g., short July 2015 coffee/long december 2015 coffee) and 
profited handsomely from the subsequent price slide. Figure 30.1 illustrates the close correspondence 
between the spread and the market. 
the fact that an outright position would have garnered a much 
larger profit is an irrelevant consideration, since the trader’s risk limitations would have prevented him 
from participating in the bear move altogether had his market view been confined to outright trades.