Welcome to Common Types of Spreads, where the general spread idea from the last unit becomes three named strategies with real long and short legs. The last unit set up that a spread trades the gap, not market direction. This unit pins down the one thing the exam traps hardest on: for each spread type, which leg is long, which is short, and which way the gap has to move to profit.
Exam Weight: Part 1 spans ~71% of the exam across Chapters 1-7 combined; the National Futures Association (NFA) does not publish per-unit weights.
What You'll Learn
In this unit, you'll cover:
- Carrying Charge Spreads: What a two-delivery-month spread on a single commodity is, why the deferred month trades above the nearby by the cost of carry in a normal market, and why that gap has a ceiling at full carry but no floor
- Bull and Bear Spreads: The directional labels put on a carrying charge spread, the leg assignments that never flip (bull is long the nearby, bear is short the nearby), which way each one needs the gap to move, and why the profit is the differential rather than the flat price
- Intermarket Spreads: The spread between two different but related commodities in the same delivery month, driven by the economic relationship between the two products rather than by storage costs, and how it differs from a carrying charge spread
Why This Matters
Spread questions on this exam live or die on direction. Swap which leg is long and which is short, or misread which way the gap has to move, and a right idea turns into the wrong answer. Get the anchors straight, that a normal market puts the deferred over the nearby and that a bull spread is long the nearby, and the whole family of spread questions becomes a matter of reading the setup rather than guessing.
Let's start with carrying charge spreads.