If you find yourself constantly being whipsawed by the volatility of the stock market, you might want to consider this commonly used strategy by professionals called spread trading. In this article, we will discuss how spread trading can help us to reduce our trading risks and portfolio volatility.
What Is Spread Trading?
Spread trading is the act of simultaneously buying one product and selling another product. It is also widely known as pair trading in stock market terms. The fundamental of spread trading is to buy the product that is undervalued, relative to the one that we are selling, and vice versa.
If we think stock A is undervalued compared to stock B, we will buy A and sell B. Similarly, if we think stock A is overvalued compared to stock B, we sell A and buy B.
Why Trade Spreads?
The main benefit of trading spreads