What is Spread Trading?

S pread trading is a term which applies to finance. A spread trade, or a relative value trade, is the simultaneous purchase of one security in addition to the sale of a related security. Spread trading can be executed with options or futures contracts. The idea behind spread trading is simple; it is to mitigate risk in holding either a long or short position in a security. Spread trading combines both a long and a short position in related futures contracts. This allows for a trader to mitigate risk by evaluating the market and hedging against major gains or losses in said commodities. Lastly, it is important to recognize the different types of spread trades. There are intracommodity which trades the spread is on the same commodity versus intercommodity which trades the spread is on different commodities. There is intramarket which has the positions traded on the same exchange versus intermarket which has the legs of the spread trade on different exchanges. Lastly, there is intradelivery which has the contracts mature in the same delivery month versus interdelivery which has the contracts mature in different delivery months.