Spread Order

A spread order is a combination of individual futures orders ( legs ) that work together to create a commodity trading strategy. A simple spread order involves two positions, one long and one short. They are taken in the same related commodities. Prices of the two futures contracts therefore tend to go up and down together, and gains on one side of the spread are offset by losses on the other. The spreading goal is to profit from a change in the difference between these two prices. A spread order can also be established between different months of the same commodity, between related commodities or between the same or related commodities traded on two separate exchanges.

Various types of commodity spreads include:

Bull spread - An commodity options spread strategy designed to profit from a rise in a commodities price, by buying a near-month futures contract and selling a deferred month futures contract.

Bear Spread - An commodity options spread strategy designed to profit from a drop in a commodities price, by selling a near-month futures contract and buying a deferred month futures contract.

Vertical Spread - An commodity options spread strategy involving the simultaneous purchase and sale of options of the same class and expiration date but different strike prices. also called price spread.

butterfly spread - An commodity options spread strategy built on four trades at one expiration date and three different strike prices. For call options, one option each at the high and low strike price are bought, and two options at the middle strike price are sold. For put options, the trades are reversed. This is a limited risk, limited return strategy that pays off when the price of the underlying commodity remains around the middle strike price. This strategy is essentially a combination of a bull and bear spread.

Calendar Spread - An commodity options spread strategy involving the simultaneous purchase and sale of options of the same class and strike price but different expiration dates.

Straddle - The purchase or sale of an equal number of puts and calls, with the same strike price and expiration dates. A straddle provides the opportunity to profit from a prediction about the future volatility of the market. Long straddles are used to profit from high volatility. Long straddles can be effective when an investor is confident that a commodity price will change dramatically, but cannot predict the direction of the move. Short straddles represent the opposite prediction, that a commodity price will not change.

Strangles - An options spread strategy involving a put option and a call option with the same expiration dates and strike prices which are out of the money. The investor profits only if the underlying commodity moves dramatically in either direction

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