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What will happen to the price of General Motors futures? Investors will want to buy the June futures contract, expecting that the stock and the futures will rise in response to the good news. Yet, they may not want to buy the December futures, because they believe, based on the report, that the stock may not be as strong later in the year. What happens? The June futures contract rises faster than the December, or the June futures contract rises while the December contract either remains the same or declines.

An investor who bought June futures would make money as they rise in price. An investor who bought December futures might make no money or could lose money. An investor who bought June futures and sold short December futures could make money on both ends of this strategy. However, in this case, the investor who bought June and sold short December might make money even in a declining market! How so? Think about it: if the price of General Motors declines, then the June contract may decline only by a small amount, while the December contract may decline by a larger amount. The investor has lost money on the long position, but he has made more money on the short December position than he has lost on the long June position.

As you can see, there are a number of possible outcomes with a spread. They are as follows:

Spread Behavior Outcome

Long position goes up more than short position You make money

Long position goes up while short position You make money

goes down

Long position goes down while short position You make money

goes down more than long

Long position goes down more than short position You lose money

Long position goes up less than short position You lose money

Long goes down while short goes up You lose money

Long and short move the exact same amount You lose commission

In other words, a spread can give you possibilities that a "flat position" (i.e., long or short but not spread) can. That's the good news. The bad news is that unless you use the right method(s) of selecting spreads, they will not work for you. Whether your methodology is based on fundamentals or technical or a combination of both, you still have to use effective risk management as well as a proven selection approach.

The two basic categories of spreads are intramarket spreads, or spreads in different contract months of the same market, and inter- market spreads, or spreads using similar contract months in two different markets.

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