I Why Trade Spreads?

As you can see, there are many choices. The most efficient of these, unless you consider yourself to be a long-term investor interested in dividends as well as profits on the price of the shares themselves, is to make your transaction in the SSF market where the margin required will be much lower than it would be in the underlying stocks themselves.

Trading in spreads allows you to capitalize on several possibilities at the same time. In some ways it gives you a greater degree of protection than trading in a "flat" position (by which I mean long or short but not specifically spread). If you trade intramarket spreads, then the degree of fluctuation between one contract month and

another contract month of the same market will not be as large or as volatile as the degree of fluctuation between two different SSFs (i.e., intermarket spread). Hence, an intramarket spread can, at times, provide you more safety than a flat position or an intermar- ket spread. The lesser degree of volatility appeals to many traders, particularly those who have very limited funds with which to trade. The problem is, however, that very often such individuals are newcomers to the markets and have difficulty enough understanding how futures work, let alone how spreads work. The idea of being long and short in the same market at the same time is a source of confusion to many traders. Nonetheless, the spread can offer more stability if it is used correctly. As in virtually all cases of risk and reward, the less risk a trader takes, the less the potential reward.

Advantages and Disadvantages of Spread Trading

Spreading has its advantages and disadvantages. The advantages of spread trading in SSFs are as follows:

•  Spread trading allows you to take advantage of divergent
trends and/or differences in market strength either in the same
SSF contract or in different SSFs at the same time.

•  Margin requirements on an intramarket spread are often very
low.

•  Intramarket spreads tend to be less volatile and less risky (but
this is not always the case).

•  Intramarket SSF spread trading is a good way to speculate on
the difference between current market trends and anticipated
market trends.

•  Professional traders often use spreads. Hence, you'll be in good
company when you trade spreads (assuming that your trade se­
lection is valid and you manage your risk effectively).

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