Intermarket Spread

Understanding Intermarket Spread

The world of trading is vast and full of terms that might be new to you. Among these terms is the Intermarket Spread. So, what exactly does this term mean?

Defining the term Intermarket Spread

An Intermarket Spread involves two related but distinct markets. It may be described as a strategy in which a trader simultaneously purchases a contract in one market and sells a contract in another market. Both contracts must be for the same commodity, but have different delivery months or different exchanges. This strategy helps in neutralizing the impact of market risk.

Purpose of an Intermarket Spread

A key reason for using an Intermarket Spread is to take advantage of price discrepancies between different markets. Such discrepancies may occur due to factors like seasonal conditions, availability of the commodity, and demand trends. A well-placed intermarket spread strategy can lead to significant profits.

Example of an Intermarket Spread

To understand Intermarket Spread better, let's take an example. Suppose a trader believes that the price of wheat will increase more in the Chicago market than in the Kansas City market in December. They will buy a December wheat contract in the Chicago market and simultaneously sell a December wheat contract in the Kansas City market. If their prediction turns out to be true, they will profit from the spread.

Risk Involved in Intermarket Spreads

While Intermarket Spread trading can yield sizable earnings, it's not without risks. Unpredicted changes in market factors, such as government policies, natural disasters or changes in transport costs, can affect the value of the commodities and hence the spread.

Conclusion

In conclusion, Intermarket Spread trading is an advanced strategy used to benefit from the price discrepancies between various markets. As with all trading strategies, it requires careful study, considerate planning, and a well-informed understanding of the commodities and the markets in question.