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The Breakdown of Bull and Bear Spreads

, , | March 8, 2024 | By

When it comes right down to it, there are two perspectives that a trader can have on a market: bullish or bearish. If you’re bullish, then you expect prices to rise for the foreseeable future. Conversely, if you’re bearish, then you expect prices to fall. The beauty of futures trading is that profits can be made from both bullish and bearish opinions―all you need to do is get on the right side of the market.

Trading spreads is one way that many futures pros capitalize on rising and falling asset prices. Bull spreads, bear spreads, and associated strategies are some of the most popular ways of assuming long or short positions in the market. Offering vastly reduced margin requirements and risk exposure, spreads provide traders several unique advantages over conventional futures.

Trading Bull Spreads

A bull spread is a futures trading strategy that’s designed to profit from rising asset prices. To initiate a bull spread, a trader simultaneously buys and sells the same futures product in different contract months. To capitalize on rising prices, a long position is opened in the near month while a short position is opened in the deferred month.

Any trades are educational examples only. They do not include commissions and fees.

To illustrate the functionality of a bull spread, let’s assume that Carrey the ag specialist is bullish toward corn pricing over the coming year. He decides to forego buying or selling outright futures in favor of executing a bull spread. Here’s how Carrey gets the job done:

  1. On February 1, Carrey buys 10 lots of CME July corn at 391’6.
  2. Also on February 1, Carrey sells 10 lots of CME December corn at 391’2.

Once the buy/sell orders are filled at market, Carrey’s bull spread is live. He’ll make a profit if July corn rallies faster than December corn, or if July rallies and December holds its value. However, the inverse scenarios will produce a drawdown on Carrey’s account balance.

Bull spreads, bear spreads, and other related strategies are frequently used by producers and speculators alike. The relative simplicity of the trade mechanism is intuitive and user-friendly. All you have to do is make an educated guess on market direction and execute the trade.


Trading Bear Spreads

A bear spread is a strategy used to cash in on falling asset prices. To execute, the trader sells a near-month contract while buying a deferred-month contract of the same futures product.

As an example of how a bear spread works, let’s assume that Carrey has had a change of heart toward the corn market. To benefit from an expected downturn, Carrey takes the following steps:

  1. On March 1, Carrey sells 10 lots of July CME corn at 388’6.
  2. Also on March 1, Carrey buys 10 lots of December CME corn at 389’4.

Carrey’s bear spread goes live as soon as each of the orders is filled at market. In the event that prices of July corn fall faster than those of December corn, he will tally a profit.

Any trades are educational examples only. They do not include commissions and fees.

When trading bull spreads, bear spreads, or really any futures spread, it is important to understand the concept of near-month pricing sensitivity. Generally speaking, the further out a contract’s expiration date, the less volatility a futures product exhibits. Accordingly, near-month contract prices tend to be more volatile than those of deferred months. Though not a mathematical certainty by any stretch of the imagination, this phenomenon is a key driver of bull and bear spread performance.

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