The spread reduces the level of risk that a speculator is exposed to, as compared to trading in outright futures. Due to this, exchanges have less strict margin requirements for futures spreads.
Spreads can be done in one exchange or in different exchanges. If it is done on the same exchange, long and short positions can be taken in the same underlier, with different maturities. A long-short position can also be taken in different underliers, though usually this is done with the same maturity.
Trading can also be done on different exchanges, though this is usually done with the same underlier. This may be done to earn arbitrage profits, or in the case of commodities and energy underliers, to create an exposure to the price spread between two points of delivery.
Another advantage of spread trading is that there is no need for real time data and end-of-day data or delayed data can be used. This saves traders from having to spend on expensive real time data systems. Another very big advantage of spread trading is that there is no need for a spread trader to monitor trends on his/her computer screen all day long.
Spreads often trend at times when outright futures are flat, and the trends in spreads are much more dramatic than they are in outright futures contracts.
Spreads provide lots of trading opportunities of different types. For example, you can spread one index against another, one stock against the sector index, or one stock against another.
Due to the lower margin requirements, spread traders can trade more and can also profit from a better return on margin.
Trading spreads is suitable for experienced professionals as well as beginners. Even those who are engaged in day trading can trade spreads at the end of the day to improve their trading performance.
Spreads can be very profitable, but it involves risk. If you are a beginner, it is best to seek the advice of an independent financial advisor, before you step into future option trading. Think carefully about the risk involved and about how much money you can afford to invest.
Create your own trading plan and start by investing small amounts of money. Invest in a disciplined way and stick to your trading system at all times. Practice paper trading until you understand how the market works