Stock Symbol

But why trade spreads? The simple and initial explanation is that conditions in stocks change over time. What may be bullish in the short term may be bearish in the long term. The bull trends of today become the bear trends of tomorrow. The prospects for AT&T over the next six months may be very positive, but nine months or a year from now conditions may not be as promising. Could it be possible to take advantage of such natural fluctuations in market trends and underlying conditions for a stock? Yes, indeed it can. The spread allows you to do so. A more specific explanation of how follows.

Consider the long June Ford futures/short June General Motors futures spread. How can this spread work to make money for you? Consider the possibility that over the next three months the profit picture at Ford is likely to improve dramatically at the same time conditions at General Motors will deteriorate as a function of various fundamental factors. In this case, would it be possible to buy Ford and sell short General Motors, making money on both ends of the game?

Could Ford increase its share price at the same time General Motors shares decline? Yes, indeed, this is possible, and, moreover, it happens all the time. Stocks move in their own directions even within the same industry group. One airline can do well while another can falter. One semiconductor chip maker can make huge profits while another makes only small profits. Can one group of stocks rise while another falls or rises less quickly? Can one stock fall sharply while another declines only slightly? Yes! These are some of the conditions that create spread opportunities.

Buy the Airlines — Sell the Petroleum Stocks

As a further example of a spread in SSFs, consider the following fundamental scenario: The economy has been strong. Airline passenger traffic is at a ten-year high. The economic forecast calls for

even more travel. The earnings outlook for the next year is very positive. A number of industry analyses are forecasting a price rally in most of the major airlines. At the same time, the price of petroleum appears to be reaching a peak. Forecasts of petroleum production suggest that prices will decline over the next three to six months.

Is there a way you could take advantage of this situation? Here are some of the possibilities using SSFs:

•  You could buy one or more of the airlines stocks.

•  You could sell short one or more of the petroleum stocks.

•  You could buy one or more airline SSF contracts.

•  You could sell short one or more petroleum SSF contracts.

•  You could buy an airline SSF index.

•  You could sell short a petroleum index SSF.

•  You could buy an airline SSF contract and sell short a petro­
leum SSF contract simultaneously.

•  You could spread the airlines sector against the petroleum sec­
tor by using the SSF narrow-based indexes for these industry
groups.

•  You could buy an airline SSF contract while selling short a pe­
troleum SSF contract.

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