A spread trade occurs when an investor purchases a security and then simultaneously sells a related security (called the "leg"), all as a single unit. As such, it's a type of options trade.

Essentially, a "spread" is the difference between two prices, such as between a bid and an asked price or between the price paid and that received for a product. In underwriting stocks or bonds, the spread is the difference between what the investment banks sells the securities for and the amount of funds the issuer receives.

Futures and options typically form the legs of a spread trade; the contracts are executed to generate a profit. The value of this profit—the spread—reflects the difference between the prices of the legs.

Spreads are traded as a single unit on futures exchanges to ensure that the completion of the trade is perfectly synchronized, to eliminate the chance that one leg doesn't properly follow through. Spread trades are designed to generate gains from the narrowing or widening of the spread, as opposed to the direct price fluctuations of the legs.

As an example, a spread trader might bet on the difference in prices between the best cyclical stock and the worst cyclical stock; September orange juice futures and October orange juice futures; or January Chicago wheat and January Kansas wheat.

The spread trade is a way for investors to use leverage, by which they can make a big profit (or loss) from a relatively small investment. Spread trades take big advantage of market imbalances, with relatively small upfront investments.