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Spread Trading:An Intro Guide to UnderstandingHedge Trading and itsApplications.

What Is Spread Trading? .............................................................................................................................................1

Spread Trading Mechanics .........................................................................................................................................2

Types of Spreads .........................................................................................................................................................4

Charting Spreads .........................................................................................................................................................6

Why Trade Spreads? ....................................................................................................................................................7

To Spread Or Not to Spread? ......................................................................................................................................9

Quiz Yourself About Spread Trading .......................................................................................................................10

More Information About Spread Trading and Additional Resources ..................................................................14

About the Author .......................................................................................................................................................15

Table of Contents

THE DATA CONTAINED HEREIN ARE BELIEVED TO BE RELIABLE BUT CANNOT BE GUARANTEED AS TO RELIABILITY, ACCURACY, OR COM-

PLETENESS; AND AS SUCH, ARE SUBJECT TO CHANGE WITHOUT NOTICE. CFEA WILL NOT BE RESPONSIBLE FOR ANYTHING, WHICH

MAY RESULT FROM RELIANCE ON THIS DATA OR THE OPINIONS EXPRESSED HERE IN.

DISCLOSURE OF RISK: THE RISK OF LOSS IN TRADING FUTURES AND OPTIONS CAN BE SUBSTANTIAL; THEREFORE, ONLY GENUINE

RISK FUNDS SHOULD BE USED. FUTURES, SPREADS AND OPTIONS MAY NOT BE SUITABLE INVESTMENTS FOR ALL INDIVIDUALS, AND

INDIVIDUALS SHOULD CAREFULLY CONSIDER THEIR FINANCIAL CONDITION IN DECIDING WHETHER TO TRADE. OPTION TRADERS

SHOULD BE AWARE THAT THE EXERCISE OF A LONG OPTION WOULD RESULT IN A FUTURES POSITION. SPREAD TRADERS SHOULD BE

AWARE THAT SPREAD MARGIN REQUIREMENTS ARE SUBJECT TO CHANGE WITHOUT NOTICE AND WILL NOT ALWAYS BE LOWER THAN

OUTRIGHT FUTURES POSITIONS.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW.

NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY TO, ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE

SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE AC-

TUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT

OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD

CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND

LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM, IN SPITE OF TRADING LOSSES, ARE MATERIAL POINTS WHICH CAN ALSO

ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS, IN GENERAL,

OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION

OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

What Is Spread Trading?

Spread trading is also sometimes referred to as “hedge trading,” because it involves a long (buying) position in one or more futures contract(s) and a short (selling) position in another similar or related contract(s). In other words, the purchased (long) contract is “hedged” by the sold (short) position to some extent.

Rather than being concerned with absolute price levels of any specific market, spread traders are concerned with the relative pricing of contracts. The key word is RELATIVE, as spread traders are speculating on price differentials between different futures contracts—not the absolute price level like the standard futures trader. The positions that a spread trader establishes usually—but not always—involve less risk than an outright futures position, because they involve at least a “long” and a “short” position in related markets. This means that if the general market advances or declines, one of the futures contracts theoretically should show a profit.

For example, the most common type of spread position established is known as an INTRAMARKET spread, which involves buying one futures contract and selling a different delivery month in the same market—such as buying July Soybeans and selling November Soybeans.

The speculator establishing this position—long July and short November Soybeans—is not concerned with the absolute price level of soybeans, but in the RELATIVE PERFORMANCE of July Soybeans vs. November Soybeans. If July Soybeans increase in value relative to November Soybeans, the spread position will show a gain. However, if the July contract decreases in value relative to the November contract, then this position will result in a loss.

Inside this RJO sponsored brochure, you learn:

• whatspreadsareandhowtheyarecalculated • thevarioustypesofspreads • howspreadprofitsandlossesarecalculated • theprosandconsofusingspreads

Spread: The price difference between two different but related contracts.

Spreads are priced on a relative basis or LONG-SHORT, meaning that spread prices can be either positive or negative.

For example, assume that July Soybeans (SN) are trading at 1005 and November Soybeans (SX) are trading at 1050 when a long July, short November position is established—creating a spread price of -45 cents/bu.

CONTRACT PRICE SPREADSN 1005 SX 1050 SPREAD 1005-1050 = -45

Now, assume that the July contract (SN) increases by +50 cents/bu. and the November contract increases by +35 cents/bu. Under this scenario, the SPREAD would have moved from -45 cents/bu. to -30 cents/bu., an increase of +15 cents/bu. for the position.

In other words, when a spread moves from a larger negative number to a smaller negative number—such as from -45 to -30—a spread trader will reap a profit as the long position is increasing relative to the short position, despite the fact that both went up.

SHORT SHORTLONG +

SHORT + LONG -

+ = GAIN

LONGLONG +SHORT

LONGSHORT +

- = LOSS

1

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As mentioned, spread traders look at the price differen-tial of the spread, rather than the absolute price levels. The contract that is viewed as “cheap” is purchased—or a long position is established). And the contract that is viewed as “expensive” is sold—or a short position is established. If market prices move as expected (meaning the long position gains in value relative to the short position), the trader profits from the change in the relationship between the prices.

The concern for a spread trader is the change in the relationship between the contract that he or she is long and the one that he or she is short. For example, assume that a trader is buying (long) July CBOT Wheat and Selling (short) December CBOT Wheat. The trader will profit from this position if any of the following five situations occur:

1. The long contract rises in price, while the short contract decreases. 2. The long contract rises in price, more than the short contract. 3. The long contract rises in price, and the short contract stays at the same price. 4. The long contract stays the same price, while the short contract’s price declines. 5. The long contract declines in price, less than the short contract.

Spreading: The simultaneous buying and selling of two related markets, in the expectation that a profit will be made when the position is offset. Examples include: buying one futures contract and selling another futures contract on the same commodity, but with a different delivery month; buying and selling the same delivery month on different ex-changes; buying a given delivery month of one futures contract and selling the same delivery month (or close to it) of a different but related futures market.

Spread Trading Mechanics

Spread Example 1: Long Gains, Short Decreases Long Short Spread Jul Dec Jul-DecDay 1 500 480 +20Day 2 510 475 +35Change +10 -5 +15P&L $500 $250 +$750

Spread Example 2: Long Gains More Than Short Long Short Spread Jul Dec Jul-DecDay 1 500 480 +20Day 2 510 485 +25Change +10 +5 +5P&L $500 -$250 +$250

Spread Example 3: Long Gains, Short Flat Long Short Spread Jul Dec Jul-DecDay 1 500 480 +20Day 2 510 480 +30Change +10 0 +10P&L $500 $0 +$500

Spread Example 4: Long Gains, Short Decreases Long Short Spread Jul Dec Jul-DecDay 1 500 480 +20Day 2 510 475 +35Change +10 -5 +15P&L $500 $250 +750

Spread Example 5: Long Declines Less Than Short Long Short Spread Jul Dec Jul-DecDay 1 500 480 +20Day 2 510 475 +35Change +10 -5 +15P&L $500 $250 +750

The following are HYPOTHETICAL examples of a Chicago Board of Trade (CBOT) Wheat Spread between the July and December contracts, showing profitable trade scenarios.

Obviously, the converse situations will result in losses. The above examples do not consider commissions and fees, which will reduce profits and increase losses.

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Obviously, the converse is also true! When the pur-chase contract (long) underperforms the sold contract (short), a loss will be incurred on the position. In the marketplace (especially in futures), there is no such thing as a “free lunch”—and all of speculation entails taking risk, including spreads.

So though some spreads have a basic market bias, known as “Bull” and “Bear” spreads, the key to spread trading is in the relative performance of one futures contract to another. In other words, a spread trade is simply a speculation that one contract will outperform another contract—and profits and losses are calcu-lated on the relative performance.

Spread Example 1: Long Decreases, Short Increases Long Short Spread Jul Dec Jul-DecDay 1 500 480 +20Day 2 490 485 +5Change -10 +5 -15P&L -$500 -$250 -$750

Spread Example 2: Long Falls More Than Short Long Short Spread Jul Dec Jul-DecDay 1 500 480 +20Day 2 480 475 +5Change -20 -5 -15P&L -$1,000 +$250 +$750

Spread Example 3: Long Decreases, Short Unchanged Long Short Spread Jul Dec Jul-DecDay 1 500 480 +20Day 2 490 480 +10Change -10 0 -10P&L -$500 $0 -$500

Spread Example 4: Long Gains Less Than Short Long Short Spread Jul Dec Jul-DecDay 1 500 480 +20Day 2 510 500 +10Change +10 +20 -10P&L $500 -$1,000 -$500

Spread Example 5: Long Declines More Than Short Long Short Spread Jul Dec Jul-DecDay 1 500 480 +20Day 2 510 475 +35Change +10 -5 +15P&L $500 $250 +750

The following are HYPOTHETICAL examples of a CBOT Wheat Spread between the July and December contracts, showing losing trade scenarios.

The above examples do not consider commissions and fees, which will reduce profits and increase losses.

To gain an edge

in understanding

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and trends, get your free Intro to Technical

Analysis guide. Call 800-441-1616.

4

Types of Spreads

There are three basic types of spreads: Intramarket (interdelivery),Intermarket,andIntercommodityspreads.

The most common spread type traded is the Intramar-ket spread, also known as the Delivery spread. An Intramarket spread position attempts to take advantage of the price difference between two delivery months of a single futures market when the trader perceives the difference to be abnormal. The Intermarket or Inter-exchange spreads are basically limited to the Wheat market for most traders: Trading either Chicago Wheat vs. Kansas City or Minneapolis, or Kansas City vs. Min-neapolis Wheat. Many years ago, there were different opportunities in the Metals markets, like trading Chi-cago Silver vs. New York Silver, but these opportunities have dried up in recent years—despite the fact that the Metals are now listed on both the Chicago and New

York Exchanges, as the price differentials are too small and fleeting for most traders to take advantage. Now the Wheat market makes up the bulk of the Intermarket spreads, with trading between Soft-Red Winter Wheat (CBOT Wheat, symbol W) and either Hard-Red Winter (KCBT Wheat, symbol KW) or Hard-Red Spring Wheat (MGEX Wheat, symbol MW).

The last general category for spreads is the Inter-commodity spreads, or trading one market against another. These spreads are commonly done, and can theoretically include any commodity against any other commodity. However, only a few of the combinations of intercommodity spreads are exchange-recognized and receive a break in margins, as usually margins for spreads are lower. The most widely recognized Intercommodity spreads are as follows:

Intramarket(Delivery)Spreads: This type of spread entails the simultaneous purchase of one delivery month and the sale of another delivery month of the same commodity on the same exchange. An example would be buying July Corn and selling December Corn on the CBOT.

Intermarket(Exchange)Spreads: This type of spread entails the simultaneous purchase of a given com-modity and delivery month on one exchange and the sale of the same commodity and delivery month on a different exchange. An example would be buying March Wheat on the CBOT (symbol: W) and selling March Wheat on the Kansas City Board of Trade (symbol: KW).

Intercommodity(Commodity)Spreads:This type of spread entails the simultaneous purchase of one commodity and delivery month and the sale of another different but related commodity with the same (or similar) delivery month. An example would be buying August Lean Hogs and Selling August Live Cattle.

Grains

Corn/Wheat Soybeans/SoymealSoybeans/Soyoil

Petroleum

Crude Oil/GasolineHeating Oil/Gasoline

Financial

10 Yr Notes/30 Yr Bonds10 Yr Notes/5 Yr Notes

Metals

Gold/Platinum Gold/Silver

Currency

Euro/Pound Canadian/AussyYen/PoundEuro/Swiss

Livestock

Live Cattle/Lean HogLive Cattle/Feeder Hog

Note: Not all exchange-recognized Intercommodity spreads are listed here; only the most popular spreads are listed. For a complete list, please contact your RJO Futures advisor.

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THE BEST MEASURE OF RISK IN THE FUTURES MARKET IS MARGIN REQUIREMENTS. THE LOWER THE MARGIN, THE LOWER THE RISK IN MOST CASES, AND VICE VERSA.

Intramarket (Delivery) spreads are usually the least risky. This is evidenced by the fact that they usually have the lowest margin requirements, as they are the SAME market (with only DIFFERENT contract months). However, traders should take into account that in the Agricultural commodities, Intramarket spreads between “Marketing Years” can entail more risk than even a straight outright futures position. (For example, Long July Soybeans and Short November Soybeans, known as a “Old Crop vs. New Crop” spread.)

Intermarket (Exchange) spreads usually carry the next highest risk. This type of spread is usually limited to the Wheat Market—CBOT Wheat (W) vs. KCBT Wheat (KW), CBOT Wheat vs. MGEX Wheat (MW), or KCBT Wheat (KW) vs. MGEX Wheat (MW). But with exchange consolidation and globalization, traders may wish to understand that difference in deliverable grades, and production areas can have an enormous impact on pricing.

The highest risk and margin requirement type of spread is almost always the Intercommodity (Commod-ity) spreads involving two different markets. Margin requirements are higher—but usually less than the combination—because traders can experience either the long gaining in value while the short decreases, or the long falling in price while the short increases. This type of spread is the most volatile—sometimes more volatile than the sum of the positions—and therefore entails the most risk and reward potential.

TRADERS SHOULD NOT ASSUME THAT SPREADS ALWAYS CARRY LESS RISK THAN AN OUTRIGHT POSITION. IT IS POSSIBLE FOR ANY SPREAD TO HAVE A HIGHER MARGIN REQUIREMENT THAN THE SUM OF ITS COMPONENTS—AS MARGIN REQUIREMENTS ARE SUBJECT TO CHANGE WITHOUT NOTICE: GENERALLY, SPREAD MAR-GINS AND RISK ARE LOWER IN SPREAD—BUT NOT ALWAYS!

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Charting Spreads

Most futures traders base their decisions (at least partially) on the price action of the market in question via TECHNICAL ANALYSIS. Such analysis can and is also actively done by SPREAD Traders, with a little modification.

Spread charts are usually created on a “close only” basis, creating line charts as opposed to the normal bar charts (OHLC) that most traders are accustomed to. This is done because the only price for all contracts that can be stated as absolutely true at the same exact time is the settlement (Close) price—as such spread charts, which represent the price between two or more contracts, are usually drawn on a close only basis.

Close only pricing can be both an advantage and a disadvantage to traders. It is advantageous as traders do not need to monitor prices as closely during the day, as most spreads are less volatile. It is a disadvantage as the spread traders’ reaction time may be slower.

Spread Chart Examples:

Intramarket (Delivery) Spread

Intermarket (Exchange) Spread

Intercommodity (Commodity) Spread

Charts compliments of www.TRYTNT.com

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Why Trade Spreads?

The main reasons most professional traders state for trading spreads are:

1. Lowerrisk 2. Attractivemarginrates 3. Increased predictability

Because of their hedged nature, spreads generally are less risky than outright futures positions. Most of the professional traders who trade spreads usually cite this as their No. 1 reason. Since the prices of two different futures contracts (on the same commodity or different, but related commodities) exhibit a strong tendency to move up or down together, spread trading offers protection against losses that arise from unexpected or extreme price volatility.

Of course, not all spreads have lower risk than outright futures positions, but most do—as a spread position is hedged by a long contract and a short contract, or partially “hedged.”

Spreads offer “protection,” because losses on one side of the spread are more or less offset by gains from the other side of the spread. For example, if the short (sell side) of a spread results in a loss due to an increase in price, the long (buy side) side of the spread should produce a profit offsetting much (if not all) of the loss.

Because of the partially hedged nature of spread posi-tions, spread margins tend to be margined at a lower rate than outright futures positions. This is not always the case, but one can expect spread margins to be lower than outright futures positions as a general rule of thumb. Like any other margin requirement, spread margin minimum levels are set by the exchanges and can be higher depending upon your brokerage house. Spread margins are subject to change without notice, by either your brokerage house or the exchange, just like any other margin level is.

Due to the generally lower margin levels charged for spreads, traders are able to trade a larger variety of positions, increasing their diversity. Also, because of the lower margin rates, which are a function of volatility, spreads allow traders to risk a smaller percentage of

their capital on any one trade, enabling lower capital-ized traders to practice conservative money manage-ment, like the commodity funds are supposed to.

Lastly, many spread traders feel that spreads are more predictable than outright futures positions. Some of

Ponder PointsBecause of their hedged nature, spreads tend to be less volatile than outright futures posi-tions. Lower volatility is usually associated with lower risk.

The lower risk associated with most spreads is evident by the lower margin requirements for spreads.

For example, the initial margin for July CBOT Corn is currently $2,025/contract. A May/July CBOT Corn spread has an initial margin re-quirement of $135/spread, while the often more volatile July/December CBOT Corn spread has an initial margin of $405/spread.

Spread margins are typically lower than outright futures margins, because a loss on one side of the spread is often at least partially offset by a gain on the other side.

Each side of a spread is often referred to as a “leg.” For example, a Long July/Short Decem-ber Corn spread would have a long “July leg” and a short “December leg.”

Many traders also use the term “leg” as a verb, meaning to establish one side at a time. For example, buy July Corn and at a later time “leg into” the Short December positions.

Each side or “leg” of a spread does not need to be established simultaneously, though many spread traders recommend it

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this predictability could be due to the lower risk involved in spreads—evidenced by the lower margin rates. With lower volatility, it is easier for the traders to take advantage of longer-term price moves: The lower volatility makes it easier for most traders to ride out corrections within major trends, instead of being shaken out of a position on these corrections—which often happens to straight futures traders. Also, spreads are much less sensitive to sudden shocks to a market, such as news events or such. Because of this, many traders feel they are more predictable.

Lastly, some feel the spread markets are more predict-able because they are off the beaten path. Thousands of systems have been developed for trading futures. As such, some of the strong tendencies of the markets have shifted, because they have become so popular and well known. However, spread trading is still considered much too complicated or esoteric for many—and many of these spread market anomalies have not yet been worked out of the market.

Obviously, it is impossible to say that spreads are more predictable than any other price series. But given the lower level of volatility, they may well be more “forgiv-ing” of errors in price predictions. Given the generally lower margin requirements associated with spread trading—allowing traders to practice more prudent money management—spread traders may well acquire more trading experience.

Ponder PointsAll positions in the futures and options markets are a balance between risk and reward.

Spreads are usually less volatile than outright futures positions. This lower volatility means that the absolute value of the risk of loss is generally lower. However, it also means that the absolute value of gains is lower.

The major attraction for many spread traders is not the pursuit of huge, oversized sudden gains, but simply a slow and steady vehicle to participate in the market.

The leverage in the futures market is a two- edged sword, creating quick fortunes and ruinous financial legacies. Spread positions may help to smooth out these wild swings, with generally smaller profits and losses

Margin is the “good faith” deposit on a futures position. The risk of loss associated with a futures position—outright or spread—is a function of margin, but is not limited to the margin value. In other words, it is possible to lose more than the required margin.

Margin requirements are a reflection of volatil-ity, or probable price movements. The gener-ally lower margin requirements associated with most spread positions means they are less volatile. This lower volatility may mean that speculators are able to stay in the market for longer periods of time—and as such, hopefully see their positions benefit from correct macro-economic forces that may be more predictable than short-term unpredictable moves.

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To Spread Or Not to Spread?

Spreadsoffermanyadvantagestotraders,generally including:

1. lowermarginrates 2. lowerpricevolatility 3. lessexposuretoseveremarketevents,due to their partially “hedged” nature

But spread trading does have its disadvantages. Cost is chief among the factors working against spread traders.

Commissions adversely affect profitability. Com-missions for spread trading are higher vs. straight (outright) futures positions; spread positions involve multiple contracts, hence commission costs increase (at least 1 commission for the long and 1 commission for the short) and adversely affect trader profit and loss.

In some cases, spread positions can involve more risk than a straight (single) futures position, as it is possible for any type of spread to experience an increase in the short position simultaneously with a decrease in the long position. Also, some spreads may involve deferred and therefore less liquid contracts, and therefore may increase risks.

However, prudently chosen spread positions (i.e., with the benefit of your RJO Futures advisor’s experience and expertise) should exhibit lower volatility and require lower performance bond levels (margin), enabling speculators to establish beneficial positions over longer-term time horizons than straight (long or short) futures positions.

Many studies have shown that speculators tend to lose money, because they operate at margin levels that are too high—meaning that the risk they assume is too large, relative to their account size. Speculators may be able to counteract this fatal flaw using SPREAD positions.

Spread trading, like all speculation, involves risk. But when done correctly, spread trading can allow traders to withstand more adverse movements (draw downs) to eventually make profits. Also, due to the generally

lower capitalization requirements (margins) of spread positions, speculators may be able to diversify across more markets, and risk smaller portions of their ac-count balances on any one position, thus THEORETI-CALLY decreasing their risk of ruin.

Spread trading has many benefits, as well as some drawbacks. As it is off-the-beaten path of most trading, it may be an excellent arena for traders who are willing to study and practically implement their knowledge with less competition. Spread trading in no way guarantees profits, but it may be a vehicle to enable smaller traders to make longer-term, sound and practical decisions in today’s extremely volatile futures markets.

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1. Ratherthanbeingconcernedwithabsolutepricelevelsofspecificmarkets, spreadtradersareconcernedwiththerelativepricingofcontracts. a. True

b. False

2. Which of these is an Intermarket Spread? a. A spread that entails the simultaneous purchase of one delivery month and the sale of another

delivery month of the same commodity on the same exchange.

b. A spread that entails the simultaneous purchase of a given commodity and delivery month on one

exchange and the sale of the same commodity and delivery month on a different exchange.

c. A spread that entails the simultaneous purchase of one commodity and delivery month and the

sale of another different but related commodity with the same (or similar) delivery month.

d. None of the above

3. Which of these is an Intercommodity Spread? a. A spread that entails the simultaneous purchase of one delivery month and the sale of another

delivery month of the same commodity on the same exchange.

b. A spread that entails the simultaneous purchase of a given commodity and delivery month on one

exchange and the sale of the same commodity and delivery month on a different exchange.

c. A spread that entails the simultaneous purchase of one commodity and delivery month and the

sale of another different but related commodity with the same (or similar) delivery month.

d. None of the above

4. Which of these is an Intramarket Spread. a. A spread that entails the simultaneous purchase of one delivery month and the sale of another

delivery month of the same commodity on the same exchange.

b. A spread that entails the simultaneous purchase of a given commodity and delivery month on one

exchange and the sale of the same commodity and delivery month on a different exchange.

c. A spread that entails the simultaneous purchase of one commodity and delivery month and the

sale of another different but related commodity with the same (or similar) delivery month.

d. None of the above

5. The best measure of risk in the futures market is margin requirements. a. True

b. False

Quiz Yourself: Are You Ready to Advance to the Next Step or Do You Need to Review?

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6. If a speculator is Long July Soybeans and Short November Soybeans, and July Soybeans increase in value relative to November Soybeans, which of the following occur? a. The spread position will break even.

b. The spread position will show a gain.

c. The spread position will show a loss.

7. A trader who is long July CBOT Wheat and short December CBOT Wheat will profit in which of the following situations. a. The long contract rises in price, more than the short contract.

b. The long contract rises in price, while the short contract decreases.

c. The long contract declines in price, less than the short contract.

d. None of the above

e. All of the above

8. All speculation entails taking risk, including spreads. a. True

b. False

9. Spread charts are usually created as bar charts. a. True

b. False

10. Spread charts are usually created on a “close only” basis. a. True

b. False

11. Which are considered benefits of spread trading? a. Lower risk

b. Attractive margin rates

c. Increased predictability

d. None of the above

e. All of the above

12. Cost can be a disadvantage of spread trading. a. True

b. False

13. Spread margins are typically set at a higher rate. a. True

b. False

14. Spread margins are subject to change without notice, by either your brokerage house or the exchange. a. True

b. False

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15. Each side of a spread is often referred to as: a. An arm b. A leg c. A foot d. A torso

16. It is not possible for an increase in the short position to occur simultaneouslywithadecreaseinthelongposition,whenitcomesto spread trading. a. True b. False

17. Spreadpositionscanoccasionallyinvolvemoreriskthanastraightsingle futures position. a. True b. False

18. Spreadtradingmaybeavehicletoenablesmallertraderstomake longer-term, sound and practical decisions. a. True b. False

19. Spreadtradingisalsoknownashedgetrading. a. True b. False

20. Thespreadtraderisconcernedwithabsolutepricelevels,morethan relativepricing. a. True b. False

Answers and Scoring on following page.

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Answers

1. (a), 2. (b), 3. (c), 4. (a), 5. (a), 6. (b), 7. (e), 8. (a), 9. (b), 10. (a), 11. (e), 12. (a), 13. (b), 14. (a), 15. (b), 16. (b), 17. (a), 18. (a), 19. (a), 20. (b)

Each correct answer equals 1 point.

My score: __________

Scoring (out of 20 possible points)

17-20 = You Understand Spread Trading Contact an RJO Futures representative at 800-441-1616 now, and learn how you can turn your new knowledge into possible trading opportunities. We can help.

12-16 = YouMayWanttoRevisittheMaterial You’ve learned a fair amount about spread trading. But we recommend you revisit the material to fully grasp the concepts. Once you have it down, you may be ready to apply what you’ve learned to your trading.

1-11 = DefinitelyRevisittheMaterial,andTaketheQuizAgain. No worries. You simply need to reread the material and/or contact an RJO Futures Trading consultant at 800-441-1616 for assistance. We’ll be happy to walk you through any parts of this guide to help you to better understand the content. And we offer many other resources to help you along the way.

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This intro to spread trading is meant to be just that, an intro. In order to take advantage of the full potential value of spread trading, we encourage you to learn more about it.

As a next step, we invite you to contact one of our Trading Advisors here at RJO Futures. He or she will be able to walk you through some of the principles detailed in this intro—as well as take you to the next level in your under-standing of spread trading and its uses.

Contact us at

Phone:(800)441-1616or(312)373-5478Email: info@rjofutures.com Web:www.rjofutures.com

More Information About Spread Trading

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RJO Futures Intro to Fundamental Analysis

Now that you’ve got a primer on spread trading, why not give our Intro to Fundamental Analysis guide a try?Contact an RJO Futures Trading Advisor at (800) 441-1616 or (312) 373-5478 to get your free copy today.

RJO Futures Basics of Money Management

A successful trading plan includes a sound money management plan.Contact an RJO Futures Trading Advisor at (800) 441-1616 or (312) 373-5478 to get your free guide today.

Additional Resources

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Scott Barrie

Scott Barrie owns Commodity Futures and Equity Analytics and is the former head of research and operations for Great Pacific Trading Company in Oregon, an educational brokerage specializing in introducing newcomers to speculating in the futures and options markets.

He has 12 years experience in the financial derivatives industry, including time as a trader and hedge specialist. He is a regular contributor to Stocks & Commodities magazine and Stock Trader’s Almanac and has been quoted in The Wall Street Journal, Investors Business Daily, and Barron’s.

About the Author