near months for futures contracts tend to move farther than faster than the back months. Thus, a trader may employ a bull futures spread during a seasonal phase when prices are rising and may use a bear futures spread when prices are declining due to seasonality. The trader does not care if the prices of Corn and Wheat go up or down; the trader only wants to see the price of Corn appreciate over the price of Wheat. For example, lets say it is February of 2011 and there is a shortage of corn. That is why when you are long the near month and short the deferred, it is called a bull futures spread.
For example, July corn is trading.05, and December corn is trading.75. The spread is 30 cents. If July corn moves up faster than December corn, the spread will increase. Commodity futures spreads are a lower risk approach to trading commodity futures that can be utilized by traders of all levels of experience.
Finally, if you like this post, you may also like my other article, The Wonderful World of Futures Spread Trading. However, as we have seen above, they do have several advantages over trading the underlying/actual contracts and are amenable to both fundamental and technical analysis. The Corn market has the greatest supply right after harvest in the fall, which can lead to lower prices during that time of year. Alternatively, you can execute a Dec-July spread, selling the new crop and buying the old crop.
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Risks may therefore be better managed by trading a futures spread instead of an actual contract. For instance, in bullish seasonal markets, front month contracts traditionally would outperform further out contracts but because of the size of the roll where huge volumes of the front month are being sold and long positions are being rolled to the next month, that has. For example, a trader might buy December corn and sell December wheat. In such conditions the market is said to be normal. If there is a major external Corn market event, like the stock market crashes, the fed raises interest rates, a war breaks out, or a foreign country defaults on its bonds half way across the earth, both contracts should be affected equally. If corn is in a bull market, May (near month) should go up faster than July (deferred month).
Spread trading strategies in commodities