Futures Spread

A futures contract involves setting up a deal now that will close at some point in the future. You're basically locking in a price at some future date. Unlike an option, you don't have the choice whether to close the deal. You've committed to the transaction...it's just not happening right now. As the name says: it's happening in the future.

A futures spread involves taking two opposite positions on the same underlying asset (usually, in this case, a commodity). So you create one futures contract to buy corn at a certain price in the future. At the same time, you create a separate futures contract to sell corn.

Why would you do that? It sounds like betting both black and red in roulette at the same time, right?

The idea is that you've spotted some price discrepancy in the market. You're using the futures spread to arbitrage the gap between the prices. You don't know if one price will go up or if the other will go down. But you know that at some point, the prices will converge. So you're playing the spread. As the price gap narrows, you'll make money.

Often, the legs of a futures spread have different time frames. You have a short-term futures contract to sell corn and a long-term future to buy corn. Or vice versa. You're taking advantage of different prices for the commodity over time. This variation of the strategy is called a "calendar spread."