What is the Spread in Trading? Spread Strategies and Their Practical Application

The concept of spread is fundamental for any trader seeking to optimize their financial operations. Essentially, the spread in trading represents the price difference between two financial instruments that are traded simultaneously. This strategy allows traders to execute offsetting buy and sell positions on correlated assets, taking advantage of price variations between markets or different timeframes.

Spread trading makes it easier for investors to build more sophisticated strategies without the complexity of managing multiple orders independently. By executing two opposite positions in a coordinated manner, traders can protect themselves against directional market movements and benefit from predictable price differences.

Basic Definition of Spread in Financial Operations

A spread in trading represents the numerical difference between the entry prices of two complementary segments. This difference can be positive, negative, or zero, depending on how the operation is structured. The key point is understanding that profits or losses in a spread trade depend on how that difference evolves at the time of closing the position.

The concept of “increase” or “decrease” of the spread is based solely on the numerical value, not on the absolute magnitude. For example, if the entry spread is -100 points and changes to -80 upon exit, it has technically increased. If it changes to -120, it has decreased. This precision in definition is crucial for accurately calculating profits and losses.

How Spread Trading Works: Execution Mechanisms

Spread trading involves specific pairings of financial instruments with different characteristics. Traders can combine spot (cash) assets, perpetual contracts, or futures with different expiration dates. Common combinations include spot versus perpetual, spot versus futures, perpetual versus futures, or two futures with different maturities.

The core mechanism is atomic execution, a system that guarantees both segments are executed in equal quantities or not at all. This eliminates the risk of asymmetry, where one leg executes while the other fails. By simultaneously opening two opposite positions (long and short) of equal volume, traders achieve delta-neutral configurations, meaning they are protected against directional market movements.

A spread operation requires identifying the “near leg” (the position that expires first) and the “far leg” (the position with a later expiration date). Instruments are classified based on their proximity in time: spot (closest), perpetual, short-term futures, and long-term futures (more distant).

Strategic Benefits of Spread Trading for Traders

Spread operations offer multiple advantages for those looking to refine their investment strategies. First, the spread is “locked in” at the moment of execution, providing certainty about the price difference between both legs. This predictability reduces the inherent uncertainty of regular operations.

Atomic execution provides additional security: it guarantees that the quantities are equal in both legs or that the operation is not completed at all, eliminating partial risks. This contrasts with creating two separate orders, where one might execute and the other fail.

Spread operations also simplify the operational process. Instead of creating and managing independent orders in the order book, traders can execute complex combinations with just a few clicks, reducing friction and coordination errors.

From a risk management perspective, spread trading allows offsetting market volatility with opposing positions. This minimizes exposure to adverse price movements. Traders can implement advanced strategies such as funding rate arbitrage, carry trades, and basis strategies, all more easily than in conventional trading.

Additionally, trading fees on spreads are significantly lower—typically 50% less than the cost of placing two separate orders in the regular order book. VIP status users receive an extra 50% discount on their existing VIP rates, maximizing net profitability.

Types of Orders and Configurations in Spread Trading

Spread trading supports a variety of orders and strategies to suit different operational approaches. Traders can use limit orders (specifying a maximum or minimum price) or market orders (executed at the best available price).

Regarding execution strategies, options include Post-Only (avoids taking liquidity), Good-Till-Canceled or GTC (valid until manually canceled), Immediate-or-Cancel or IOC (execute immediately or cancel unfilled), and Fill-or-Kill or FOK (execute fully or cancel everything).

Position configurations are limited to unidirectional mode, while for margin, traders can choose between cross margin (pool all available funds) or isolated margin (assign specific margin per position). These settings allow greater control over capital management and risk exposure.

An important feature is that traders can enable leverage on spot segments for margin trading or keep it disabled for regular spot operations. Leverage can be configured individually per segment, allowing up to 10x in spot and 100x in futures, providing flexibility in position building.

Technical Analysis: Spread Calculations and Formulas

Mathematical precision is essential in spread trading. The order price in a spread operation represents the differential between the entry prices of both legs. This price can be determined to reflect the exact desired spread.

Entry prices are automatically calculated using the following formulas:

Order Price = Long Leg Entry Price − Short Leg Entry Price

Long Leg Entry Price = (Long Leg Mark Price + Short Leg Mark Price + Order Price) ÷ 2

Short Leg Entry Price = (Long Leg Mark Price + Short Leg Mark Price − Order Price) ÷ 2

For spot assets, the index price is used instead of the mark price, providing a more objective reference.

Understanding these formulas allows traders to verify that their operations execute exactly as expected, with spreads matching their initial orders precisely.

Practical Examples: Profits in Spread Operations

Buy Spread Scenario: When buying a combination, the trader buys the far leg and sells the near leg. Profits occur when the spread widens (becomes less negative or more positive).

Consider a perpetual-future combination where:

• Future mark price: 90
• Perpetual mark price: 83
• Quantity: 3 contracts
• Initial spread order price: -3

Calculated entry prices:

• Future entry: 85
• Perpetual entry: 88

If prices change to future 90 and perpetual 89:

• Future profit: 15 points
• Perpetual loss: -3 points
• Net profit: 12 points

If prices invert (future 83 and perpetual 90):

• Future loss: -6 points
• Perpetual loss: -6 points
• Total loss: -12 points

Sell Spread Scenario: When selling a combination, the trader sells the far leg and buys the near leg. Profits happen when the spread narrows.

Using the same instruments, if the order price is 11 (wider spread):

• Future entry: 92
• Perpetual entry: 81

If prices move to future 94 and perpetual 83:

• Loss in future: -6 points (sold, price rose)
• Gain in perpetual: 6 points (bought, price rose)
• Total result: 0 points

These examples demonstrate how spread trading allows benefiting from relative changes between instruments, regardless of the overall market direction.

Fee Structure and Cost Optimization in Spread Trading

Spread operation fees are significantly lower compared to placing two independent orders. The typical reduction is 50%, making this strategy more cost-efficient.

VIP users receive an additional 50% discount on their existing VIP rates, resulting in substantial savings for active traders.

Once a spread trade is executed, both legs behave as normal positions, following standard margin and liquidation requirements. Traders can manage these positions within the spread trading section or in their respective markets, offering flexibility in portfolio management.

Spread trading is a sophisticated tool that combines precise mathematical calculations with strategic flexibility, enabling traders to execute delta-neutral operations with optimized costs and guaranteed execution.