How To Understand Time Spreads in Futures Trading

Time spreads in futures trading are more efficient and stable than the other types of trading such as straight futures trading and share trading. The assets involved in the trading contract are less affected by markettrends, which makes time spreads less of a risk to invest in. Trying to understand investments and financial transactions can be difficult for anyone who has never made an investment or dealt with financial trading.

There will be finance terms that you’ve never encountered before which makes it even harder to understand the concept of time spreads in futures trading. To get a grasp of the concept you need to learn the language used by traders and then you can move on to learn the investment process in futures trading. 

1. Finance terms

There are terms that you will often read or hear that won’t make sense if you are not into trading. These terms are loosely used by investors, traders and financial consultants. These are some of the terms that will often appear when time spreads and futures trading are discussed.

  • Strike price – This is the fixed price of a stock, security, asset or commodity. This is the price that will be used in the contract or transaction.
  • Assets – In financial trading an asset could be anything that is tangible or intangible and could produce value. The value can either increase or decrease depending on the influence the market has over them.
  • Put option - The put option refers to the right given to a buyer to sell the stock or asset with the given strike price.
  • call option – The call option is the right given to a buyer to purchase the stock or commodity at the given strike price.
  • Underlying – This refers to the assets, stocks, commodities or assets that is being sold or purchased.
  • Derivative – This refers to the deal entered by the buyer and seller. It serves as the contract between both parties. The concept of a contract usually involves actual commodities or assets, in a derivative there are no actual products but a value of the proposed exchange.

2. Understanding the concept

In a situation where the asset or group of assets that an investor owns is about to expire within the next 30 days, the investor can ask his broker or the person handling his investments, to look for another option. The option should hold the same strike price as the assets he is holding but with a longer expiration date. The concept of the time spread will be applied when the broker finds another option with the same strike price but will expire in 90 days. The 30 day asset will be sold off to purchase the longer option. This way the investor will have moved his investment from the expiring assets to the new one and will get to trade with the same valued assets a little while longer.

Familiarize yourself with the terms used in financial trading. Knowing what these terms mean will help you understand trading activities in futures trading.