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A spread is simply the simultaneous buying of one
contract and selling of another. To be a true spread, however,
there must be some reason to believe that the conditions that will
cause price movement in one contract will also cause price movement in
the other. There are two types of spreads:
1. Intracommodity spreads - the prefix "intra"
means within the same and the prefix "inter" means between different.
So the term intracommodity refers to a spread within the same
commodity. Example - buying a January crude oil contract and selling a
March crude oil contract. This spread involves the same
commodity - crude oil, but different expiration months. The
intramarket spread trader is not concerned with the absolute price of
a commodity, only the changes that occur in the premium or discount.
2. Intercommodity spreads - As the name implies,
this is a spread between two different commodities. Example - buying a
January crude oil contract and selling a January unleaded gasoline
contract. To be a true spread, there must be some relationship between
the two commodities that will tend to cause the prices to move in the
same direction simultaneously. If they do not, the spread trade
becomes a risky trade, as the two positions can move in opposite
directions. In a typical spread, one of the trades will show a
loss while the other will show a profit. the profit to the
trader occurs when the relative difference between the two prices
changes in a favorable direction.
Although spreads are among the most consistent
and reliable of all trading methods, few traders recognize their
value. This has been the case for many years. Although traders
are always searching for the best trading tools and systems, they
often overlook techniques that have had a history of good reliability.
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