Spreads

by National Futures Association (NFA)

As previously discussed, spreads involve the purchase of one futures contract and the sale of a different futures contract in the hope of profiting from a widening or narrowing of the price difference. Because gains and losses occur only as the result of a change in the price difference—rather than as a result of a change in the overall level of futures prices—spreads are often considered more conservative and less risky than having an outright long or short futures position. In general, as long as you are trading the same number of futures contracts, this may be the case.

It should be recognized, though, that the loss from a spread can be as great as—or even greater than—that which might be incurred by having an outright futures position. An ad-verse widening or narrowing of the spread during a particular time period may exceed the change in the overall level of futures prices, and it is possible to experience losses on both of the futures contracts involved (that is, on both legs of the spread).

Reprinted with permission from the National Futures Association. Copyright 2002.