Spread Trading

Spread trading is a strategy not dependent on the direction of the market which consists in considering two financial instruments that are related to each other and simultaneously take a long position on one instrument and one short position on the other.

The correlation between the two securities ensures that market performance does not affect the strategy, as long and short positions result in profits and losses that offset each other, thus minimizing risk.

The potential profits therefore take place when, in spite of the correlation, the two instruments move away momentarily from their point of equilibrium, based on their future and statistically probable rapprochement.

This particular strategy is called "convergence spread trading" and consists in taking a long position on the instrument that is currently weaker and at the same time a short position on the most performing one.

Examples of Spread Trading on different Assets are:

Calendar Spread:

Between two futures contracts with the same underlying but different time limits, for example Crude Oil Futures with different maturity months

Inter-Market Spread:

Between two futures contracts with the same maturity but different underlying as long as correlated, for example Brent and Light Crude Oil Future

Inter-Exchange Spread:

Between future contracts with the same maturity and the same underlying but listed on different exchanges

Intra-Market Spread:

Between two related equity securities listed on the same stock exchange