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Trading and Investment Terminology

Spread Trading

Spread trading is a combination of a long and a short position at the same time in related futures contracts or options, called legs. 

 

The aim of Spread Trading is to gain profit from the widening or narrowing of the spread between two related futures contracts or options. 

 

Similarly, a commodity spread trading is a strategy of simultaneous purchase and sale of the same or a similar commodity. 

These positions may be on the same exchange or on different exchanges and in the same maturity contract or different maturity contracts.

 For example, buying & selling Lead and Zinc futures contracts respectively at the same on the expectation that there spread will narrow down in the future.

Spread trading is a profitable tool if used with proper analysis and following the disciplines of trading. 

The expectation of always generating profit from spread trading is not possible but if used with proper risk reward management, the probability of odds in favor is always higher.

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