I am writing this entry to substantiate on what I have learnt in class about price spreads. Mark had already written in his first blog entry about entering the market with a spread. So, I am here to elaborate more on his entry about the various kinds of spreads and why people hold them.  Basically a spread is a combined holding of one short futures position and a concurrent long position of another related futures contract.

There are several types of spreads:

1. An Intra-Market Spread is the holding of two contracts of the same commodity and exchange but of different delivery months. It can be intra-seasonal (two contracts that trade within the same crop year) or inter-seasonal (two contracts that are in two different crop years). One thing to note here is that a crop year is defined as the year based on the period from one harvest to the next harvest. However, a harvest may take a few months within the crop year because of differences in growing seasons in various areas. For instance, the wheat harvest begins in south Texas in mid-May and finishes in southern Canada in late August.
2. An Inter-Market Spread is the holding of two contracts of the same commodity and delivery month but of different exchange. For example, there are three different wheat market traded at the Chicago Board of Trade, Kansas City Board of Trade and the Minneapolis Grain Exchange. Although wheat is being traded at all three exchanges, the type, use and delivery points of wheat vary at each exchange. Hence, each market has dissimilar fundamentals.
3. An Inter-Commodity Spread is the holding of two different but related commodity contracts of the same delivery month (the individual contracts may or may not be from the same exchange). For example, corn and soybeans have a spread relationship because the commodities compete for planting acreage with each other. The price of soybeans is usually 2.5 to 3 times the price of corn due to differences in yield. In this way the return per acre are kept around the same. In addition, the corn and wheat spread exists because different crop year cycles creates a combination of seasonal and spread harvest and planting pressure.

The objective of spreading is to gain profit on the change in price differential between the two elements (legs of the position). Hence, we do not have to care about the actual price level of the market or the general trend of the market (unlike the outright position trading).

http://www.fxf1.com/english-books/Edward%20Dobson%20-%20Understanding%20Spreads.pdf