Question: I understand the concept of a futures spread, but I get confused when they talk about ‘going long a spread’ or ‘going short a spread’. Given a spread has both a long position and a short position. How then can you go long or short a spread?
Answer: The concept of being long or short a spread relates to how a spread is quoted or displayed on a chart.
I have recently been following a spread in US Treasury note futures, specifically the spread between the December 10yr note and the December 5yr note.
On the following chart, the spread is shown as the 5yr price minus the 10yr price. Generally speaking, this is how the spread between the two is shown – it is the 5yr contract minus the 10yr contract.
To go long the spread would involve buying the first contract and selling the second. In this instance it would mean buying the 5yr note and selling the 10yr note. In this case you would make money from an increase in the spread – hence you are “long the spread”.
To go short the spread, you would sell the first contract and buy the second. That is, sell the 5yrs and buy the 10yrs – making money from a fall in the spread. You would be “short the spread”.
All in all, terms such as going long, going short, narrowing, widening etc are just that – terms. They can confuse at first but learning them is helpful when reading up on trading ideas. There is no rocket science though. Most terms describe pretty simple concepts.
The way I write the ProTrader Digest newsletter is so the subscriber learns these things as we go along. It is not a black box trading system. Concepts and terms are explained and a subscription comes with as much support as you need.
-Guy Bower
