Fly Spread
What is a Fly Spread?
A ‘fly spread’ is a trading term used for hedging when trading. It requires buying and selling highly correlated assets in the correct ratios to each other.
An example of a fly would be going long in the front month, short in the 2nd month and long in the furthest month in the ratio of +1, -2, +1.
The idea behind using a fly strategy is that it reduces the risk (but also lowers the return) of a position through hedging. Whichever way the market moves, one of the positions will make a profit and the idea is that the profit-making position will outweigh the losing position.
The risk is that the fly spread will diverge or contract in the opposite way to which you are hoping, and that money is lost this way.
A fly spread usually has low-to-medium returns, but reasonably low risk.
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