When an investor is optimistic about the price of a commodity, they believe that the price will rise and continue to rise. Conversely, an investor with a negative outlook believes the price will continue to decline. Investors buy commodities based on their pricing opinions regarding the commodity in question.
Revolutionary Spread
The revolutionary spread is determined using the strike prices between the high and low prices that the trader wishes to trade. The strike price is the option that the trader buys, without having to execute it, which guarantees them the ability to buy or sell at the price they purchased.
The revolutionary trader buys a call option on a commodity – known as going long – at a low strike price, and another option to short sell the same commodity – known as going short – at a high strike price. The difference between the strike prices for buying and selling is the spread; this technique reduces the risk of selling at very low prices or buying at very high prices while maximizing profit.
Revolutionary Spread for Sale
The revolutionary spread for sale is constructed by selling a call option at a strike price and then buying a call option at a higher strike price.
Types of Spreads
There are other types of spreads between bulls and bears. These spreads include the trader’s view not only on explicit price fluctuations but also on time structure movements, or the price differences between months in the commodities market.
Backwardation
Commodities are traded in time frames with a delivery date. Deferred prices refer to later months in the period, while nearby prices refer to months in the period that are close to the purchase date. Backwardation is a market condition where the deferred prices are lower than the nearby prices.
Buying nearby futures contracts and selling deferred futures contracts in the same commodity is a revolutionary spread in futures. This spread makes money if backwardation widens or if nearby prices rise more than deferred prices. This occurs when supply shortages increase.
Reverse Spread
The reverse spread involves selling nearby futures contracts and buying deferred futures contracts. Backwardation is a market condition where deferred prices are higher than nearby prices.
The reverse spread in futures makes money if backwardation widens or if deferred prices rise more than nearby prices. This occurs when there is a market surplus. Both of these futures spreads are internal spreads for the commodity, they are temporal or calendar spreads, and they express the market’s view on supply and demand.
Conclusion
In the world of commodities, the futures market offers numerous ways for market participants to express their bullish or bearish views on price or supply and demand. The spreads between bulls and bears are complex trading mechanisms typically used by advanced and knowledgeable traders.
The types of positions taken by traders can determine the actions they take in their derivative and commodity trading. The spreads between bulls and bears help investors reduce the risk of capital loss while providing maximum returns in bullish and bearish markets—as long as their assumptions about price trends are correct.
Source: https://www.thebalancemoney.com/bull-and-bear-spreads-in-commodities-808913
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