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Check The Futures Spread Over Spot Before Trading
05 May 2023

What is a Future Spread?

A futures spread is an arbitrage tactic in which a trader has two positions on a commodity to profit on a price difference. Futures spread is a unit transaction in which the trader has both a long and a short position.

Understanding a Futures Spread

The objective of future spread is to make a profit by taking advantage of the difference in price that exists between two distinct positions. A trader might attempt to take futures spread on an asset by purchasing both sides of the spread if they feel there is a possibility that they could profit from price volatility. This would require the trader to acquire both sides of the spread.

Types of Futures Spread

  • Intra-Commodity Calendar Spread: A futures contract that is prolonged in the same commodities market, but the buying and selling legs are separated by several months. A trader may, for instance, buy a wheat futures contract for the month of March and then sell a wheat futures contract for the month of September.
  • Inter-Commodity Futures Spread: A futures spread between two unrelated commodities having the same contract month. For example, a trader who is more positive on the wheat market than the corn market would purchase wheat futures while selling corn futures. If the price of wheat rises above the price of corn, the trader gains.

Bitcoin Futures Spread Trading

Bitcoin futures trading started in December 2017. These futures contracts provide a way for futures spread to profit from market volatility. For example, a trader who feels a price will go up over time might take a purchase contract one month out and a sell contract two months out at a higher price. They execute their option to purchase in the one-month contract and then sell in the two-month contract, taking advantage of the difference.

Trading Margin for Futures Spreads

Given the decreased volatility, futures spreads have smaller margins than trading a single contract. If an external market event happens, such as a surprise interest rate change or terrorist attack, both the buy and sell contracts should be impacted equally—that is, the gain on one leg should balance the loss on the other. Futures spread effectively hedges against systematic risk, enabling exchanges to lower spread trading margins.

You can achieve a profitable transaction by timing your trades correctly and selecting the correct strike prices. If trading doesn't appeal to you, another option is to consider investing in upcoming IPOs. Whatever you decide, make sure you always have a Demat and trading account in your name. You must invest in the financial markets with one. Open a Demat account with Motilal Oswal today in a matter of minutes.

Related IPO Articles: How to Make Money In F&O Trading | Know About Future & Options Span Margin Calculator

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