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What is spread trading?

Spread trading – also known as relative value trading – is the simultaneous buying and selling of related securities as a unit, designed to profit from a change in the spread (price difference) between the two securities. The primary goal for investors is to use the spread itself as a way to generate profit when the spread widens or narrows.

What are the legs of a spread trade?

Each of the transactions is referred to as a ' leg .' How Does a Spread Trade Work? The purpose of a spread trade is to net a profit from the difference in the two legs -- known as the spread. Futures and options typically form the legs of a spread trade.

Why are spread trades executed as a single unit?

Spread trades are executed as a single unit on futures exchanges in order to A) ensure that the completion of the trade is perfectly synchronized, B) eliminate the risk of one leg failing to execute, and C) take advantage of the narrowing or widening of the spread -- as opposed to the direct price fluctuations of the legs.

What are IRS Spread trades?

Not to be confused with Swap spreads, IRS Spread trades are formed with legs in different currencies but the same or similar maturities. Two notable examples, U.A.E. Dirham and Saudi Riyal interest rate swaps, are quoted in the inter-bank market as spreads to US dollar interest rate swaps.

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