What is a spread trade?
A spread trade is when two related securities are bought and sold simultaneously as a single unit. Each of the transactions is referred to as a ‘leg’. The idea is that you profit from the difference in the two legs, but you can also lose of course.
Where have you heard about spread trades?
Spread trades are typically used with futures contracts, and are a way for investors to take advantage of market imbalances. In futures trades, spreads can significantly reduce the risks compared with straight futures trading.
What you need to know about spread trades.
Traders can use a relatively small amount of capital to make a good profit as spread trades aren’t as volatile as normal share trading.
A spread trade combines both a long and short position held at the same time. It's a way to offset the risks of holding only a long or short position. Let's use a spread on copper futures as an example. If copper increases in price, the gain on the long position will offset the loss on the short one. If the price of copper drops, the reverse would be true.