In forex trading, a term spread trade refers to a market position where an investor maintains a long position in one contract while simultaneously holding a short position in another contract that has the same or a similar underlying asset. The spread signifies the difference between the long position and the short position.

Spread trades are most commonly executed using futures or options contracts, but other securities, such as bonds, can also be utilised.

Term spread trade creates a unique market-neutral position. If the underlying asset of a spread trade appreciates throughout the spread trade, the investor earns a profit on the long position while incurring a loss on the short side.

When an investor focuses on the term spread, they do not try to gain profits from the price movements of an underlying asset. A trader seeks to profit from the overall dynamics of the spread as it widens or narrows. Purchasing a spread indicates a wager on the spread’s expansion, involving going long on the contract with the higher price and shorting the one with the lower price. Conversely, selling a spread involves the opposite action.