Spread Trading:

An Intro Guide to Understanding Hedge Trading and its Applications.

The private client division of R.J.OBrien & Associates

rjofutures.com

800. 441.1616

Table of Contents
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

THE DATA CONTAINED HEREIN ARE BELIEVED TO BE RELIABLE BUT CANNOT BE GUARANTEED AS TO RELIABILITY, ACCURACY, OR COMPLETENESS; 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 ACTUAL 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 contractsnot the absolute price level like the standard futures trader. The positions that a spread trader establishes usuallybut not alwaysinvolve 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. SHORT + LONG + = GAIN LONG SHORT + - = LOSS
Spreads are priced on a relative basis or LONG-SHORT, meaning that spread prices can be either positive or negative.

Inside this RJO sponsored brochure, you learn: what spreads are and how they are calculated the various types of spreads how spread profits and losses are calculated the pros and cons of using spreads

SHORT SHORT LONG +

LONG LONG + SHORT

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 establishedcreating a spread price of -45 cents/bu.

Spread: The price difference between two different but related contracts.
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 marketsuch as buying July Soybeans and selling November Soybeans.

CONTRACT SN SX SPREAD

PRICE 1005 1050 1005-1050

SPREAD

= -45

Now, assume that the July contract (SN) increases by

The speculator establishing this positionlong July and short November Soybeansis 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.

+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 numbersuch as from -45 to -30a spread trader will reap a profit as the long position is increasing relative to the short position, despite the fact that both went up.

Spread Trading Mechanics

As mentioned, spread traders look at the price differential 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 soldor 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 following are HYPOTHETICAL examples of a Chicago Board of Trade (CBOT) Wheat Spread between the July and December contracts, showing profitable trade scenarios. Spread Example 1: Long Gains, Short Decreases Long Short Spread Jul Dec Jul-Dec Day 1 500 480 +20 Day 2 510 475 +35 Change +10 -5 +15 P&L $500 $250 +$750 Spread Example 2: Long Gains More Than Short Long Short Spread Jul Dec Jul-Dec Day 1 500 480 +20 Day 2 510 485 +25 Change +10 +5 +5 P&L $500 -$250 +$250 Spread Example 3: Long Gains, Short Flat Long Short Spread Jul Dec Jul-Dec Day 1 500 480 +20 Day 2 510 480 +30 Change +10 0 +10 P&L $500 $0 +$500 Spread Example 4: Long Gains, Short Decreases Long Short Spread Jul Dec Jul-Dec Day 1 500 480 +20 Day 2 510 475 +35 Change +10 -5 +15 P&L $500 $250 +750 Spread Example 5: Long Declines Less Than Short Long Short Spread Jul Dec Jul-Dec Day 1 500 480 +20 Day 2 510 475 +35 Change +10 -5 +15 P&L $500 $250 +750 Obviously, the converse situations will result in losses. The above examples do not consider commissions and fees, which will reduce profits and increase losses.

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 exchanges; 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.
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 contracts price declines. 5. The long contract declines in price, less than the short contract.

Obviously, the converse is also true! When the purchase 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 lunchand 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 contractand profits and losses are calculated on the relative performance.

The following are HYPOTHETICAL examples of a CBOT Wheat Spread between the July and December contracts, showing losing trade scenarios. Spread Example 1: Long Decreases, Short Increases Long Short Spread Jul Dec Jul-Dec Day 1 500 480 +20 Day 2 490 485 +5 Change -10 +5 -15 P&L -$500 -$250 -$750 Spread Example 2: Long Falls More Than Short Long Short Spread Jul Dec Jul-Dec Day 1 500 480 +20 Day 2 480 475 +5 Change -20 -5 -15 P&L -$1,000 +$250 +$750 Spread Example 3: Long Decreases, Short Unchanged Long Short Spread Jul Dec Jul-Dec Day 1 500 480 +20 Day 2 490 480 +10 Change -10 0 -10 P&L -$500 $0 -$500 Spread Example 4: Long Gains Less Than Short Long Short Spread Jul Dec Jul-Dec Day 1 500 480 +20 Day 2 510 500 +10 Change +10 +20 -10 P&L $500 -$1,000 -$500 Spread Example 5: Long Declines More Than Short Long Short Spread Jul Dec Jul-Dec Day 1 500 480 +20 Day 2 510 475 +35 Change +10 -5 +15 P&L $500 $250 +750 The above examples do not consider commissions and fees, which will reduce profits and increase losses.

To gain an edge in understanding changing markets and trends, get your free Intro to Technical Analysis guide. Call 800-441-1616.

Types of Spreads

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 commodity 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.

There are three basic types of spreads: Intramarket (interdelivery), Intermarket, and Intercommodity spreads. The most common spread type traded is the Intramarket 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 Interexchange spreads are basically limited to the Wheat market for most traders: Trading either Chicago Wheat vs. Kansas City or Minneapolis, or Kansas City vs. Minneapolis Wheat. Many years ago, there were different opportunities in the Metals markets, like trading Chicago Silver vs. New York Silver, but these opportunities have dried up in recent yearsdespite 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 Intercommodity 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:

Grains Corn/Wheat Soybeans/ Soymeal Soybeans/ Soyoil

Petroleum Crude Oil/ Gasoline Heating Oil/ Gasoline

Financial 10 Yr Notes/ 30 Yr Bonds 10 Yr Notes/ 5 Yr Notes

Metals Gold/Platinum Gold/Silver

Currency Euro/Pound Canadian/ Aussy Yen/Pound Euro/Swiss

Livestock Live Cattle/ Lean Hog Live 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.

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 MarketCBOT 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 (Commodity) spreads involving two different markets. Margin requirements are higherbut usually less than the combinationbecause 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 volatilesometimes more volatile than the sum of the positionsand 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 COMPONENTSAS MARGIN REQUIREMENTS ARE SUBJECT TO CHANGE WITHOUT NOTICE: GENERALLY, SPREAD MARGINS AND RISK ARE LOWER IN SPREADBUT NOT ALWAYS!

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

Why Trade Spreads?

The main reasons most professional traders state for trading spreads are: 1. Lower risk 2. Attractive margin rates 3. Increased predictability their capital on any one trade, enabling lower capitalized traders to practice conservative money management, like the commodity funds are supposed to. Lastly, many spread traders feel that spreads are more predictable than outright futures positions. Some of

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 doas 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 positions, 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

Ponder Points
Because of their hedged nature, spreads tend to be less volatile than outright futures positions. 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 requirement 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 December 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

this predictability could be due to the lower risk involved in spreadsevidenced 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 correctionswhich 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 predictable 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 manyand 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 forgiving of errors in price predictions. Given the generally lower margin requirements associated with spread tradingallowing traders to practice more prudent money managementspread traders may well acquire more trading experience.

Ponder Points
All 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 twoedged 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 positionoutright or spreadis 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 volatility, or probable price movements. The generally 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 timeand as such, hopefully see their positions benefit from correct macroeconomic forces that may be more predictable than short-term unpredictable moves.

To Spread Or Not to Spread?

Spreads offer many advantages to traders, generally including: 1. lower margin rates 2. lower price volatility 3. less exposure to severe market events, due to their partially hedged nature lower capitalization requirements (margins) of spread positions, speculators may be able to diversify across more markets, and risk smaller portions of their account balances on any one position, thus THEORETICALLY 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 todays extremely volatile futures markets.

But spread trading does have its disadvantages. Cost is chief among the factors working against spread traders. Commissions adversely affect profitability. Commissions 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 advisors 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 highmeaning 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

Quiz Yourself: Are You Ready to Advance to the Next Step or Do You Need to Review?
1. Rather than being concerned with absolute price levels of specific markets, spread traders are concerned with the relative pricing of contracts.
a. b. True False

2.

Which of these is an Intermarket Spread?

a. b. c. d. 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. 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. 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. None of the above

3.

Which of these is an Intercommodity Spread?

a. b. c. d. 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. 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. 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. None of the above

4.

Which of these is an Intramarket Spread.

a. b. c. d. 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. 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. 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. None of the above

5.

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

a. b. True False

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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. b. c. The spread position will break even. The spread position will show a gain. The spread position will show a loss.

7.

A trader who is long July CBOT Wheat and short December CBOT Wheat will prot in which of the following situations.
a. b. c. d. e. The long contract rises in price, more than the short contract. The long contract rises in price, while the short contract decreases. The long contract declines in price, less than the short contract. None of the above All of the above

8.

All speculation entails taking risk, including spreads.

a. b. True False

9.

Spread charts are usually created as bar charts.

a. b. True False

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

a. b. True False

11. Which are considered benets of spread trading?

a. b. c. d. e. Lower risk Attractive margin rates Increased predictability None of the above All of the above

12. Cost can be a disadvantage of spread trading.

a. b. True False

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

a. b. True False

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

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15. Each side of a spread is often referred to as:

a. b. c. d. An arm A leg A foot A torso

16. It is not possible for an increase in the short position to occur simultaneously with a decrease in the long position, when it comes to spread trading.
a. b. True False

17. Spread positions can occasionally involve more risk than a straight single futures position.
a. b. True False

18. Spread trading may be a vehicle to enable smaller traders to make longer-term, sound and practical decisions.
a. b. True False

19. Spread trading is also known as hedge trading.

a. b. True False

20. The spread trader is concerned with absolute price levels, more than relative pricing.
a. b. True 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 = You May Want to Revisit the Material Youve 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 youve learned to your trading. 1-11 = Definitely Revisit the Material, and Take the Quiz Again. No worries. You simply need to reread the material and/or contact an RJO Futures Trading consultant at 800-441-1616 for assistance. Well 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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More Information About Spread Trading

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 introas well as take you to the next level in your understanding of spread trading and its uses.

Contact us at
Phone: (800) 441-1616 or (312) 373-5478 Email: [email protected] Web: www.rjofutures.com

Additional Resources
RJO Futures eView, E-newsletter
This bimonthly newsletter features market analysis, reports, and commentary from our trading advisors and consultants. Sign up at: https://www.RJO Futures.com/forms/newsletter_signup.php

RJO Futures Intro to Fundamental Analysis

Now that youve 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.

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About the Author

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 Traders Almanac and has been quoted in The Wall Street Journal, Investors Business Daily, and Barrons.

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