https://www.cmegroup.com/education/...money-trades-spreads-a-three-part-series.html https://www.cmegroup.com/education/articles-and-reports/why-smart-money-trades-spreads-part-2.html https://www.risk.net/investing/7250051/why-smart-money-trades-spreads
Smart money trades outright, options too. Spread is not the only game smart money trades. But one thing spread trading is bad is the huge trading commissions traders have to pay brokers. This is why brokers like traders to trade spreads. All those $5 commissions eat into any trading profit traders can make.
Scalping spreads then commissions are an issue. Swing Trading Spreads, commissions are not an issue and that’s the path I would strongly recommend. With the substantially reduced margins you should be holding and swing trading spreads.
I used to trade NYMEX spreads for living. But got tired of it. The justifications for trading spreads are the lower risks and the commodity fundamentals from those spreads. The margins for spreads are really tiny. But to trade spreads, we have to compensate with the high volumes. The normal spreads only change by a couple of a few cents. Not like today's spread change of $0.50/MMbtu. I recall the old days during contract rolls and other events, we traded many many contacts. All the broker commissions added up. To trade spreads, we still need to build a market view, like bull or bear. If I get a market view, I can just trade outright with reduced volumes. It is just simpler to trade. Other traders can trade options etc. That is a different story.
I know there is a lot of hate for pit traders on this board, but when a spreader started bidding on the floor, the single month traders stopped selling.
I’ve traded ICE Swaps, OTC Bilateral Physical Forwards and hundreds of thousands of ICE and Nymex futures at Commercials and a HF. I can’t remember the last time I put on a butterfly or condor futures spread that was delta directional with the prompt month. In fact - unless I’m doing something Inter Market like a crack spread or an index spread I won’t even bother with the front three months
Traders make trading profit from market volatility. If traders avoid front months and avoid any market moves, I'm not sure where the trading profit comes from. Even a U/V NG spread is a directional play. Say noting about H/J NG spread. Traders have to have view on how the spread is going to behave. We were a fund specialized in NYMEX spreads. Mainly calendar spread and sometimes butterfly and condor. But most of those spreads did not move much. Had we avoid first months, then there were nothing really. Then how would we generate any trading profit?