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Chapter 2. The intermediate futures trad... > Spreads, straddles, and switches

Spreads, straddles, and switches

Spreads, straddles, and switches are actually three terms you might hear for the same animal. I'll use the most common—spread—but feel free to substitute the other two if you'd like. Spreads are a more sophisticated way of trading, and they fit well into the game plan of many traders. I know some traders who trade only spreads because they feel spreads are the best way to limit some of the risks inherent in futures and options. Actually, this is the main purpose of spreading: to reduce risk.

When you enter a spread, the objective is not necessarily to make money on a rise or fall in the market in question, but rather to make money from a change in the relationship between different prices. When you put on a spread, you buy one contract while simultaneously selling another. You are long and short in either two related commodities, or in two different months of the same commodity at the same time. The relative change between the two determines your profit or loss.


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