- 7 -
ward spreads are also referred to as "bull spreads". Conversely,
a simple commodity spread that has a long leg with a nearby
delivery date and one short leg with a more distant delivery date
is referred to as a "forward spread" since it is profitable if
the dollar difference between the two contracts declines after
the position is established. Since prices generally decline in a
falling or bear market, forward spreads are also referred to as
"bear spreads".
Since a forward spread profits when the difference between
the two contracts narrows, a forward spread will profit when the
interest rates decline. Conversely, a backward spread would
suffer a loss from the same change in interest rates. Addition-
ally, since a forward spread profits when the spread difference
narrows, a forward spread will profit from a reduction in the
price of gold even if the interest rates do not change. Con-
versely, a backward spread would suffer a loss from the same
reduction in the price of gold.
Whenever a leg of a straddle is closed out by an offset, or
in any other manner, tax consequences normally will result in the
holder realizing either a gain or a loss. Generally, in a tax-
motivated straddle trading, the loss leg will be closed out first
in order to generate a tax loss for the holder. When this
occurs, the remaining leg of the initial straddle containing an
unrealized gain, which is usually almost identical to the amount
of loss in the closed leg, constitutes an open position for the
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Last modified: May 25, 2011