What is spread order?
A spread order is a trading strategy which involves going long (buying) in one contract whilst shorting (selling) another contract of the same or different underlying. Spread orders are normally executed in the F&O segment and look at capitalizing on the difference between the prices of the executed legs referred to as the "Spread".
NSE provides trading the "Spread contract" which is the difference between 2 months Index contracts trading on NSE. You can either buy or sell a spread based on your view whether the spread difference will widen or narrow. The margins required for a spread contract is relatively lower because any change in market dynamics will affect both legs similarly.
The different types of spread trades are:
a) Calendar Spread: Involves entering into long & short position of the same underlying asset with 2 different expiry periods.
Eg: Assume Nifty Jan Futures is trading at 6150 and Feb Futures is at 6190 [difference between the 2 contracts being 40 points] you could short Nifty Feb Futures and buy Nifty Jan Futures. Any reduction in this difference would be profitable and vice versa.
b) Inter commodity spread: Trading and trying to cash in on the difference between 2 closely derived Commodity contracts. For eg: A 'Crack Spread' which involves purchasing crude oil futures and taking an offsetting position by refined products of crude oil like gasoline, diesel etc.
c) Option spreads: Involves a combination of two or more different option strikes in forming a strategy which involves limited risk.