spread trading guide

8/4/2019 Spread Trading Guide

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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

1


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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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4

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?








4. Which of these is an Intramarket Spread.








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?


13/17

11

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.


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


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.


16/17

14

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

spread trading guide

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