Spread Trading
Spread trading is a popular strategy in derivatives trading where an investor simultaneously buys and sells two related securities or derivatives to profit from the difference in their prices. Here are some of the most common types of spread trading in derivatives:
- Calendar Spreads: In this strategy, a trader simultaneously buys and sells two futures contracts on the same underlying asset but with different expiration dates. The goal is to profit from the difference in the prices of the contracts as the expiration date approaches.
- Inter-Commodity Spreads: This strategy involves trading two related commodities such as gold and silver, crude oil and natural gas, or corn and wheat. The trader buys one commodity and sells another, with the goal of profiting from the difference in price between the two.
- Intra-Commodity Spreads: This strategy involves trading two futures contracts on the same commodity but with different expiration dates. The trader buys the contract with the later expiration date and sells the one with the earlier expiration date, with the goal of profiting from the difference in price between the two.
- Butterfly Spreads: This strategy involves trading three futures contracts on the same underlying asset, with the goal of profiting from changes in the price relationships between the three contracts. The trader buys one contract, sells two contracts, and then buys another contract, all at different prices.
- Box Spreads: This strategy involves trading four options contracts on the same underlying asset, with the goal of profiting from arbitrage opportunities that arise from price discrepancies between the contracts.
Spread trading can be a complex strategy that requires a good understanding of the underlying assets and the factors that influence their prices. However, it can also be a powerful tool for hedging risk and generating profits in derivatives trading.