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Spreads are basically the difference in price between two stocks, and are normally used in option trading. A spread means buying one stock and selling a different stock with the expectation that the gap between the relative prices of the 2 stocks will either narrow or widen in your favor. E.G, you might notice that the historical relationship between the DOW index and the FTSE 100 index had become strained, with the DOW and FTSE too close together. You might in this case buy the DOW index and short the FTSE 100 with the expectation that the Dow will rise faster (or fall more slowly) than the price the FTSE 100, so making you a profit. Day trading systems using spreads are fairly common, although it takes a brave man to hold his position if it doesn't immediately go his way. You can also spread a single stock by buying one contract and selling a different (further out) contract (e.g. buy a July contract and sell an October contract. |
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