spread trading guide
TRANSCRIPT
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The private client division of R.J.OBrien & Associates
r jofutures.com 800.441.1616
Spread Trading:An Intro Guide to UnderstandingHedge Trading and itsApplications.
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What Is Spread Trading? .............................................................................................................................................1
Spread Trading Mechanics .........................................................................................................................................2
Types of Spreads .........................................................................................................................................................4
Charting Spreads .........................................................................................................................................................6
Why Trade Spreads?....................................................................................................................................................7
To Spread Or Not to Spread?......................................................................................................................................9
Quiz Yourself About Spread Trading .......................................................................................................................10
More Information About Spread Trading and Additional Resources ..................................................................14
About the Author .......................................................................................................................................................15
Table of Contents
THE DATA CONTAINED HEREIN ARE BELIEVED TO BE RELIABLE BUT CANNOT BE GUARANTEED AS TO RELIABILITY, ACCURACY, OR COM-
PLETENESS; AND AS SUCH, ARE SUBJECT TO CHANGE WITHOUT NOTICE. CFEA WILL NOT BE RESPONSIBLE FOR ANYTHING, WHICH
MAY RESULT FROM RELIANCE ON THIS DATA OR THE OPINIONS EXPRESSED HERE IN.
DISCLOSURE OF RISK: THE RISK OF LOSS IN TRADING FUTURES AND OPTIONS CAN BE SUBSTANTIAL; THEREFORE, ONLY GENUINE
RISK FUNDS SHOULD BE USED. FUTURES, SPREADS AND OPTIONS MAY NOT BE SUITABLE INVESTMENTS FOR ALL INDIVIDUALS, AND
INDIVIDUALS SHOULD CAREFULLY CONSIDER THEIR FINANCIAL CONDITION IN DECIDING WHETHER TO TRADE. OPTION TRADERS
SHOULD BE AWARE THAT THE EXERCISE OF A LONG OPTION WOULD RESULT IN A FUTURES POSITION. SPREAD TRADERS SHOULD BE
AWARE THAT SPREAD MARGIN REQUIREMENTS ARE SUBJECT TO CHANGE WITHOUT NOTICE AND WILL NOT ALWAYS BE LOWER THAN
OUTRIGHT FUTURES POSITIONS.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW.
NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY TO, ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE
SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE AC-
TUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT
OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD
CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND
LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM, IN SPITE OF TRADING LOSSES, ARE MATERIAL POINTS WHICH CAN ALSO
ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS, IN GENERAL,
OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION
OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
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What Is Spread Trading?
Spread trading is also sometimes referred to as hedge
trading, because it involves a long (buying) position
in one or more futures contract(s) and a short (selling)
position in another similar or related contract(s). In
other words, the purchased (long) contract is hedged
by the sold (short) position to some extent.
Rather than being concerned with absolute price levels
of any specic market, spread traders are concerned
with the relative pricing of contracts. The key word is
RELATIVE, as spread traders are speculating on price
differentials between different futures contractsnotthe absolute price level like the standard futures
trader. The positions that a spread trader establishes
usuallybut not alwaysinvolve less risk than an
outright futures position, because they involve at least
a long and a short position in related markets. This
means that if the general market advances or declines,
one of the futures contracts theoretically should show
a prot.
For example, the most common type of spread position
established is known as an INTRAMARKET spread,
which involves buying one futures contract and selling
a different delivery month in the same marketsuch
as buying July Soybeans and selling November
Soybeans.
The speculator establishing this positionlong July
and short November Soybeansis not concerned
with the absolute price level of soybeans, but in theRELATIVE PERFORMANCE of July Soybeans vs.
November Soybeans. If July Soybeans increase in
value relative to November Soybeans, the spread
position will show a gain. However, if the July contract
decreases in value relative to the November contract,
then this position will result in a loss.
Inside this RJO sponsored brochure, you learn:
whatspreadsareandhowtheyarecalculated
thevarioustypesofspreads
howspreadprotsandlossesarecalculated
theprosandconsofusingspreads
Spread: The price difference between
two different but related contracts.
Spreads are priced on a relative basis or
LONG-SHORT, meaning that spread prices can be
either positive or negative.
For example, assume that July Soybeans (SN) are
trading at 1005 and November Soybeans (SX) are
trading at 1050 when a long July, short November
position is establishedcreating a spread price of -45
cents/bu.
CONTRACT PRICE SPREAD
SN 1005
SX 1050
SPREAD 1005-1050 = -45
Now, assume that the July contract (SN) increases by
+50 cents/bu. and the November contract increases
by +35 cents/bu. Under this scenario, the SPREAD
would have moved from -45 cents/bu. to -30 cents/
bu., an increase of +15 cents/bu. for the position.
In other words, when a spread moves from a larger
negative number to a smaller negative numbersuch
as from -45 to -30a spread trader will reap a prot
as the long position is increasing relative to the short
position, despite the fact that both went up.
SHORT
SHORT
LONG +
SHORT +
LONG -
+ = GAIN
LONG
LONG +
SHORT
LONG
SHORT +
- = LOSS
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As mentioned, spread traders look at the price differen-
tial of the spread, rather than the absolute price levels.
The contract that is viewed as cheap is purchased
or a long position is established). And the contract that
is viewed as expensive is soldor a short position
is established. If market prices move as expected
(meaning the long position gains in value relative to the
short position), the trader prots from the change in the
relationship between the prices.
The concern for a spread trader is the change in the
relationship between the contract that he or she is
long and the one that he or she is short. For example,
assume that a trader is buying (long) July CBOT Wheat
and Selling (short) December CBOT Wheat. The
trader will prot from this position if any of the following
ve situations occur:
1. The long contract rises in price, while the short
contract decreases.
2. The long contract rises in price, more than the
short contract.
3. The long contract rises in price, and the short
contract stays at the same price.
4. The long contract stays the same price, while
the short contracts price declines.
5. The long contract declines in price, less than
the short contract.
Spreading: The simultaneous buyingand selling of two related markets, in the
expectation that a prot will be made
when the position is offset. Examplesinclude: buying one futures contract andselling another futures contract on thesame commodity, but with a differentdelivery month; buying and selling thesame delivery month on different ex-changes; buying a given delivery monthof one futures contract and selling thesame delivery month (or close to it) of a
different but related futures market.
Spread Trading Mechanics
Spread Example 1: Long Gains, Short Decreases
Long Short Spread
Jul Dec Jul-Dec
Day 1 500 480 +20
Day 2 510 475 +35
Change +10 -5 +15
P&L $500 $250 +$750
Spread Example 2: Long Gains More Than Short
Long Short Spread
Jul Dec Jul-Dec
Day 1 500 480 +20
Day 2 510 485 +25
Change +10 +5 +5
P&L $500 -$250 +$250
Spread Example 3: Long Gains, Short Flat
Long Short Spread
Jul Dec Jul-Dec
Day 1 500 480 +20
Day 2 510 480 +30
Change +10 0 +10P&L $500 $0 +$500
Spread Example 4: Long Gains, Short Decreases
Long Short Spread
Jul Dec Jul-Dec
Day 1 500 480 +20
Day 2 510 475 +35
Change +10 -5 +15
P&L $500 $250 +750
Spread Example 5: Long Declines Less Than Short
Long Short Spread
Jul Dec Jul-Dec
Day 1 500 480 +20
Day 2 510 475 +35
Change +10 -5 +15
P&L $500 $250 +750
The following are HYPOTHETICAL examples of a
Chicago Board of Trade (CBOT) Wheat Spread between
the July and December contracts, showing protable
trade scenarios.
Obviously, the converse situations will result in losses.
The above examples do not consider commissions and
fees, which will reduce prots and increase losses.
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Obviously, the converse is also true! When the pur-
chase contract (long) underperforms the sold contract
(short), a loss will be incurred on the position. In the
marketplace (especially in futures), there is no such
thing as a free lunchand all of speculation entails
taking risk, including spreads.
So though some spreads have a basic market bias,
known as Bull and Bear spreads, the key to spread
trading is in the relative performance of one futures
contract to another. In other words, a spread trade is
simply a speculation that one contract will outperform
another contractand prots and losses are calcu-
lated on the relative performance.
Spread Example 1: Long Decreases, Short Increases
Long Short Spread
Jul Dec Jul-Dec
Day 1 500 480 +20
Day 2 490 485 +5
Change -10 +5 -15
P&L -$500 -$250 -$750
Spread Example 2: Long Falls More Than Short
Long Short Spread
Jul Dec Jul-Dec
Day 1 500 480 +20
Day 2 480 475 +5
Change -20 -5 -15
P&L -$1,000 +$250 +$750
Spread Example 3: Long Decreases, Short Unchanged
Long Short Spread
Jul Dec Jul-Dec
Day 1 500 480 +20
Day 2 490 480 +10
Change -10 0 -10
P&L -$500 $0 -$500
Spread Example 4: Long Gains Less Than Short
Long Short Spread
Jul Dec Jul-Dec
Day 1 500 480 +20
Day 2 510 500 +10Change +10 +20 -10
P&L $500 -$1,000 -$500
Spread Example 5: Long Declines More Than Short
Long Short Spread
Jul Dec Jul-Dec
Day 1 500 480 +20
Day 2 510 475 +35
Change +10 -5 +15
P&L $500 $250 +750
The following are HYPOTHETICAL examples of a
CBOT Wheat Spread between the July and December
contracts, showing losing trade scenarios.
The above examples do not consider commissions and
fees, which will reduce prots and increase losses.
To gain an edge
in understanding
changing markets
and trends, get your free Intro to Technical
Analysis guide. Call 800-441-1616.
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Types of Spreads
There are three basic types of spreads: Intramarket
(interdelivery),Intermarket,andIntercommodity
spreads.
The most common spread type traded is the Intramar-
ket spread, also known as the Delivery spread. An
Intramarket spread position attempts to take advantage
of the price difference between two delivery months of
a single futures market when the trader perceives thedifference to be abnormal. The Intermarket or Inter-
exchange spreads are basically limited to the Wheat
market for most traders: Trading either Chicago Wheat
vs. Kansas City or Minneapolis, or Kansas City vs. Min-
neapolis Wheat. Many years ago, there were different
opportunities in the Metals markets, like trading Chi-
cago Silver vs. New York Silver, but these opportunities
have dried up in recent yearsdespite the fact that the
Metals are now listed on both the Chicago and New
York Exchanges, as the price differentials are too small
and eeting for most traders to take advantage. Now
the Wheat market makes up the bulk of the Intermarket
spreads, with trading between Soft-Red Winter Wheat
(CBOT Wheat, symbol W) and either Hard-Red Winter
(KCBT Wheat, symbol KW) or Hard-Red Spring Wheat
(MGEX Wheat, symbol MW).
The last general category for spreads is the Inter-commodity spreads, or trading one market against
another. These spreads are commonly done, and can
theoretically include any commodity against any other
commodity. However, only a few of the combinations
of intercommodity spreads are exchange-recognized
and receive a break in margins, as usually margins
for spreads are lower. The most widely recognized
Intercommodity spreads are as follows:
Intramarket(Delivery)Spreads: This type of spread entails the simultaneous purchase of one delivery
month and the sale of another delivery month of the same commodity on the same exchange. An example
would be buying July Corn and selling December Corn on the CBOT.
Intermarket(Exchange)Spreads: This type of spread entails the simultaneous purchase of a given com-
modity and delivery month on one exchange and the sale of the same commodity and delivery month on a
different exchange. An example would be buying March Wheat on the CBOT (symbol: W) and selling March
Wheat on the Kansas City Board of Trade (symbol: KW).
Intercommodity(Commodity)Spreads:This type of spread entails the simultaneous purchase of one
commodity and delivery month and the sale of another different but related commodity with the same (or
similar) delivery month. An example would be buying August Lean Hogs and Selling August Live Cattle.
Grains
Corn/Wheat
Soybeans/Soymeal
Soybeans/Soyoil
Petroleum
Crude Oil/Gasoline
Heating Oil/Gasoline
Financial
10 Yr Notes/30 Yr Bonds
10 Yr Notes/5 Yr Notes
Metals
Gold/Platinum
Gold/Silver
Currency
Euro/Pound
Canadian/Aussy
Yen/Pound
Euro/Swiss
Livestock
Live Cattle/Lean Hog
Live Cattle/Feeder Hog
Note: Not all exchange-recognized Intercommodity spreads are listed here; only the most popular spreads are listed. For acomplete list, please contact your RJO Futures advisor.
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THE BEST MEASURE OF RISK IN THE FUTURES
MARKET IS MARGIN REQUIREMENTS. THE
LOWER THE MARGIN, THE LOWER THE RISK IN
MOST CASES, AND VICE VERSA.
Intramarket (Delivery) spreads are usually the least
risky. This is evidenced by the fact that they usuallyhave the lowest margin requirements, as they are the
SAME market (with only DIFFERENT contract months).
However, traders should take into account that in the
Agricultural commodities, Intramarket spreads between
Marketing Years can entail more risk than even a
straight outright futures position. (For example, Long
July Soybeans and Short November Soybeans, known
as a Old Crop vs. New Crop spread.)
Intermarket (Exchange) spreads usually carry the next
highest risk. This type of spread is usually limited
to the Wheat MarketCBOT Wheat (W) vs. KCBT
Wheat (KW), CBOT Wheat vs. MGEX Wheat (MW),
or KCBT Wheat (KW) vs. MGEX Wheat (MW). But
with exchange consolidation and globalization, traders
may wish to understand that difference in deliverable
grades, and production areas can have an enormous
impact on pricing.
The highest risk and margin requirement type of
spread is almost always the Intercommodity (Commod-
ity) spreads involving two different markets. Margin
requirements are higherbut usually less than the
combinationbecause traders can experience either
the long gaining in value while the short decreases, or
the long falling in price while the short increases. This
type of spread is the most volatilesometimes more
volatile than the sum of the positionsand therefore
entails the most risk and reward potential.
TRADERS SHOULD NOT ASSUME THAT SPREADS
ALWAYS CARRY LESS RISK THAN AN OUTRIGHT
POSITION. IT IS POSSIBLE FOR ANY SPREAD TO
HAVE A HIGHER MARGIN REQUIREMENT THAN
THE SUM OF ITS COMPONENTSAS MARGIN
REQUIREMENTS ARE SUBJECT TO CHANGE
WITHOUT NOTICE: GENERALLY, SPREAD MAR-
GINS AND RISK ARE LOWER IN SPREADBUT
NOT ALWAYS!
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Charting Spreads
Most futures traders base their decisions (at least
partially) on the price action of the market in question
via TECHNICAL ANALYSIS. Such analysis can and
is also actively done by SPREAD Traders, with a little
modication.
Spread charts are usually created on a close only
basis, creating line charts as opposed to the normal
bar charts (OHLC) that most traders are accustomed
to. This is done because the only price for all
contracts that can be stated as absolutely true at the
same exact time is the settlement (Close) price
as such spread charts, which represent the price
between two or more contracts, are usually drawn on
a close only basis.
Close only pricing can be both an advantage and
a disadvantage to traders. It is advantageous as
traders do not need to monitor prices as closely
during the day, as most spreads are less volatile. It is
a disadvantage as the spread traders reaction time
may be slower.
Spread Chart Examples:
Intramarket (Delivery) Spread
Intermarket (Exchange) Spread
Intercommodity (Commodity) Spread
Charts compliments of www.TRYTNT.com
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Why Trade Spreads?
The main reasons most professional traders state
for trading spreads are:
1. Lowerrisk
2. Attractivemarginrates
3. Increased predictability
Because of their hedged nature, spreads generally are
less risky than outright futures positions. Most of the
professional traders who trade spreads usually cite this
as their No. 1 reason. Since the prices of two different
futures contracts (on the same commodity or different,
but related commodities) exhibit a strong tendency
to move up or down together, spread trading offers
protection against losses that arise from unexpected or
extreme price volatility.
Of course, not all spreads have lower risk than outright
futures positions, but most doas a spread position
is hedged by a long contract and a short contract, or
partially hedged.
Spreads offer protection, because losses on one side
of the spread are more or less offset by gains from the
other side of the spread. For example, if the short (sell
side) of a spread results in a loss due to an increasein price, the long (buy side) side of the spread should
produce a prot offsetting much (if not all) of the loss.
Because of the partially hedged nature of spread posi-
tions, spread margins tend to be margined at a lower
rate than outright futures positions. This is not always
the case, but one can expect spread margins to be
lower than outright futures positions as a general rule
of thumb. Like any other margin requirement, spread
margin minimum levels are set by the exchanges and
can be higher depending upon your brokerage house.
Spread margins are subject to change without notice,by either your brokerage house or the exchange, just
like any other margin level is.
Due to the generally lower margin levels charged for
spreads, traders are able to trade a larger variety of
positions, increasing their diversity. Also, because of
the lower margin rates, which are a function of volatility,
spreads allow traders to risk a smaller percentage of
their capital on any one trade, enabling lower capital-
ized traders to practice conservative money manage-
ment, like the commodity funds are supposed to.
Lastly, many spread traders feel that spreads are more
predictable than outright futures positions. Some of
Ponder Points
Because of their hedged nature, spreads tendto be less volatile than outright futures posi-
tions. Lower volatility is usually associatedwith lower risk.
The lower risk associated with most spreads is
evident by the lower margin requirements forspreads.
For example, the initial margin for July CBOTCorn is currently $2,025/contract. A May/JulyCBOT Corn spread has an initial margin re-quirement of $135/spread, while the often morevolatile July/December CBOT Corn spread hasan initial margin of $405/spread.
Spread margins are typically lower thanoutright futures margins, because a loss onone side of the spread is often at least partiallyoffset by a gain on the other side.
Each side of a spread is often referred to as aleg. For example, a Long July/Short Decem-ber Corn spread would have a long July legand a short December leg.
Many traders also use the term leg as a verb,meaning to establish one side at a time. Forexample, buy July Corn and at a later time leginto the Short December positions.
Each side or leg of a spread does not needto be established simultaneously, though manyspread traders recommend it
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this predictability could be due to the lower risk
involved in spreadsevidenced by the lower margin
rates. With lower volatility, it is easier for the traders
to take advantage of longer-term price moves: The
lower volatility makes it easier for most traders to ride
out corrections within major trends, instead of being
shaken out of a position on these correctionswhichoften happens to straight futures traders. Also,
spreads are much less sensitive to sudden shocks to a
market, such as news events or such. Because of this,
many traders feel they are more predictable.
Lastly, some feel the spread markets are more predict-
able because they are off the beaten path. Thousands
of systems have been developed for trading futures.
As such, some of the strong tendencies of the markets
have shifted, because they have become so popular
and well known. However, spread trading is still
considered much too complicated or esoteric for
manyand many of these spread market anomalies
have not yet been worked out of the market.
Obviously, it is impossible to say that spreads are more
predictable than any other price series. But given the
lower level of volatility, they may well be more forgiv-
ing of errors in price predictions. Given the generally
lower margin requirements associated with spread
tradingallowing traders to practice more prudent
money managementspread traders may well acquire
more trading experience.
Ponder Points
All positions in the futures and options markets
are a balance between risk and reward.
Spreads are usually less volatile than outrightfutures positions. This lower volatility meansthat the absolute value of the risk of loss is
generally lower. However, it also means thatthe absolute value of gains is lower.
The major attraction for many spread tradersis not the pursuit of huge, oversized suddengains, but simply a slow and steady vehicle toparticipate in the market.
The leverage in the futures market is a two-
edged sword, creating quick fortunes and
ruinous nancial legacies. Spread positionsmay help to smooth out these wild swings, withgenerally smaller prots and losses
Margin is the good faith deposit on a futuresposition. The risk of loss associated with a
futures positionoutright or spreadis afunction of margin, but is not limited to themargin value. In other words, it is possible tolose more than the required margin.
Margin requirements are a reection of volatil-
ity, or probable price movements. The gener-ally lower margin requirements associated withmost spread positions means they are lessvolatile. This lower volatility may mean thatspeculators are able to stay in the market for
longer periods of timeand as such, hopefullysee their positions benet from correct macro-
economic forces that may be more predictablethan short-term unpredictable moves.
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To Spread Or Not to Spread?
Spreadsoffermanyadvantagestotraders,
generally including:
1. lowermarginrates
2. lowerpricevolatility
3. lessexposuretoseveremarketevents,due
to their partially hedged nature
But spread trading does have its disadvantages. Cost
is chief among the factors working against spread
traders.
Commissions adversely affect protability. Com-
missions for spread trading are higher vs. straight
(outright) futures positions; spread positions involve
multiple contracts, hence commission costs increase
(at least 1 commission for the long and 1 commission
for the short) and adversely affect trader prot and loss.
In some cases, spread positions can involve more risk
than a straight (single) futures position, as it is possible
for any type of spread to experience an increase in
the short position simultaneously with a decrease in
the long position. Also, some spreads may involve
deferred and therefore less liquid contracts, and
therefore may increase risks.
However, prudently chosen spread positions (i.e., with
the benet of your RJO Futures advisors experience
and expertise) should exhibit lower volatility and require
lower performance bond levels (margin), enabling
speculators to establish benecial positions over
longer-term time horizons than straight (long or short)
futures positions.
Many studies have shown that speculators tend to lose
money, because they operate at margin levels that are
too highmeaning that the risk they assume is toolarge, relative to their account size. Speculators may
be able to counteract this fatal aw using SPREAD
positions.
Spread trading, like all speculation, involves risk. But
when done correctly, spread trading can allow traders
to withstand more adverse movements (draw downs)
to eventually make prots. Also, due to the generally
lower capitalization requirements (margins) of spread
positions, speculators may be able to diversify across
more markets, and risk smaller portions of their ac -
count balances on any one position, thus THEORETI-
CALLY decreasing their risk of ruin.
Spread trading has many benets, as well as some
drawbacks. As it is off-the-beaten path of most trading,
it may be an excellent arena for traders who are willing
to study and practically implement their knowledge with
less competition. Spread trading in no way guarantees
prots, but it may be a vehicle to enable smaller traders
to make longer-term, sound and practical decisions in
todays extremely volatile futures markets.
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1. Ratherthanbeingconcernedwithabsolutepricelevelsofspecicmarkets,
spreadtradersareconcernedwiththerelativepricingofcontracts.
a. True
b. False
2. Which of these is an Intermarket Spread?
a. A spread that entails the simultaneous purchase of one delivery month and the sale of another
delivery month of the same commodity on the same exchange.
b. A spread that entails the simultaneous purchase of a given commodity and delivery month on one
exchange and the sale of the same commodity and delivery month on a different exchange.
c. A spread that entails the simultaneous purchase of one commodity and delivery month and the
sale of another different but related commodity with the same (or similar) delivery month.
d. None of the above
3. Which of these is an Intercommodity Spread?
a. A spread that entails the simultaneous purchase of one delivery month and the sale of another
delivery month of the same commodity on the same exchange.
b. A spread that entails the simultaneous purchase of a given commodity and delivery month on one
exchange and the sale of the same commodity and delivery month on a different exchange.
c. A spread that entails the simultaneous purchase of one commodity and delivery month and the
sale of another different but related commodity with the same (or similar) delivery month.
d. None of the above
4. Which of these is an Intramarket Spread.
a. A spread that entails the simultaneous purchase of one delivery month and the sale of another
delivery month of the same commodity on the same exchange.
b. A spread that entails the simultaneous purchase of a given commodity and delivery month on one
exchange and the sale of the same commodity and delivery month on a different exchange.
c. A spread that entails the simultaneous purchase of one commodity and delivery month and the
sale of another different but related commodity with the same (or similar) delivery month.
d. None of the above
5. The best measure of risk in the futures market is margin requirements.a. True
b. False
Quiz Yourself: Are You Ready to Advance to
the Next Step or Do You Need to Review?
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6. If a speculator is Long July Soybeans and Short November Soybeans, andJuly Soybeans increase in value relative to November Soybeans, which of thefollowing occur?
a. The spread position will break even.
b. The spread position will show a gain.
c. The spread position will show a loss.
7. A trader who is long July CBOT Wheat and short December CBOT Wheat willprofit in which of the following situations.
a. The long contract rises in price, more than the short contract.
b. The long contract rises in price, while the short contract decreases.
c. The long contract declines in price, less than the short contract.
d. None of the above
e. All of the above
8. All speculation entails taking risk, including spreads.a. True
b. False
9. Spread charts are usually created as bar charts.a. True
b. False
10. Spread charts are usually created on a close only basis.a. True
b. False
11. Which are considered benefits of spread trading?
a. Lower riskb. Attractive margin rates
c. Increased predictability
d. None of the above
e. All of the above
12. Cost can be a disadvantage of spread trading.a. True
b. False
13. Spread margins are typically set at a higher rate.a. True
b. False
14. Spread margins are subject to change without notice, by either yourbrokerage house or the exchange.
a. True
b. False
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15. Each side of a spread is often referred to as: a. An arm
b. A leg
c. A foot
d. A torso
16. It is not possible for an increase in the short position to occur simultaneouslywithadecreaseinthelongposition,whenitcomesto
spread trading.a. True
b. False
17. Spreadpositionscanoccasionallyinvolvemoreriskthanastraightsingle futures position.
a. True
b. False
18. Spreadtradingmaybeavehicletoenablesmallertraderstomakelonger-term, sound and practical decisions.
a. True
b. False
19. Spreadtradingisalsoknownashedgetrading.a. True
b. False
20. Thespreadtraderisconcernedwithabsolutepricelevels,morethan relativepricing.
a. Trueb. False
Answers and Scoring on following page.
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Answers
1. (a), 2. (b), 3. (c), 4. (a), 5. (a), 6. (b), 7. (e), 8. (a), 9. (b), 10. (a), 11. (e), 12. (a), 13. (b), 14. (a), 15. (b), 16. (b), 17. (a), 18. (a), 19. (a), 20. (b)
Each correct answer equals 1 point.
My score: __________
Scoring (out of 20 possible points)
17-20 = You Understand Spread Trading
Contact an RJO Futures representative at 800-441-1616 now, and learn how you can turn your
new knowledge into possible trading opportunities. We can help.
12-16 = YouMayWanttoRevisittheMaterial
Youve learned a fair amount about spread trading. But we recommend you revisit the material
to fully grasp the concepts. Once you have it down, you may be ready to apply what
youve learned to your trading.
1-11 = DenitelyRevisittheMaterial,andTaketheQuizAgain.
No worries. You simply need to reread the material and/or contact an RJO Futures Trading
consultant at 800-441-1616 for assistance. Well be happy to walk you through any parts of this
guide to help you to better understand the content. And we offer many other resources to
help you along the way.
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This intro to spread trading is meant to be just that, an intro. In order to take advantage of the full potential value of
spread trading, we encourage you to learn more about it.
As a next step, we invite you to contact one of our Trading Advisors here at RJO Futures. He or she will be able to
walk you through some of the principles detailed in this introas well as take you to the next level in your under-
standing of spread trading and its uses.
Contact us at
Phone:(800)441-1616or(312)373-5478
Email: [email protected]
Web:www.rjofutures.com
More Information About
Spread Trading
RJO Futures eView,E-newsletter
This bimonthly newsletter features market analysis, reports, and commentary from our trading advisors and consul-
tants. Sign up at: https://www.RJO Futures.com/forms/newsletter_signup.php
RJO Futures Intro to Fundamental Analysis
Now that youve got a primer on spread trading, why not give our Intro to Fundamental Analysis guide a try?
Contact an RJO Futures Trading Advisor at (800) 441-1616 or (312) 373-5478 to get your free copy today.
RJO Futures Basics of Money Management
A successful trading plan includes a sound money management plan.
Contact an RJO Futures Trading Advisor at (800) 441-1616 or (312) 373-5478 to get your free guide today.
Additional Resources
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Scott Barrie
Scott Barrie owns Commodity Futures and Equity Analytics and is the former head of research and operations
for Great Pacic Trading Company in Oregon, an educational brokerage specializing in introducing newcomers to
speculating in the futures and options markets.
He has 12 years experience in the nancial derivatives industry, including time as a trader and hedge specialist. He
is a regular contributor to Stocks & Commodities magazine and Stock Traders Almanacand has been quoted in
The Wall Street Journal, Investors Business Daily, and Barrons.
About the Author