Traders who hedge tend to cluster the short side of futures contracts and the majority of speculators are continuous bulls, but traders who have the luxury of being on the actual trading floor love to trade spreads. Spreading is commonly known as buying one delivery month and selling another in the same commodity, or vice versa, shorting a front month and going long the back end.
futures contract spreads
Some of the basic commodities are traded as futures contracts basically the building blocks of a sound economy. Economic demands for these commodities tightly link these markets and the delivery months for the goods. If for example, the cost of wheat is lower than the cost of corn, which may rise due to demand, farmers will move to wheat as a feed for their live stock. When that happens it will even out the spread back to its normal rate. Those traders who are opportunistic will know the commonly accepted spreads between related markets. Trades who like to make a profit of futures contract spreads will position themselves against the deviation in the expectation of the return to normalcy, instead of taking a directional trade either long or short.
Future contract spreads are a much safer trade rather than a outright long or short position, with even lower margin requirements. New traders tend to not understand the dynamic of these and have little interest in a low beta trade. There are some online resources and books that try to explain the benefits of trading future contract spreads but very little is out there. Take this as a sign of how well the spread market has kept beginners out. There are a great deal of niche markets where floor traders and professionals alike are making themselves very wealthy. Almost to the point where it’s an invitation-only type of market.
