nlike the analysis of hedging behavior, theoretical analysis of spread behavior has been somewhat limited. With a few notable exceptions, study of spread trading has concentrated on empirical examination of the profitability of specific trades (e.g., Eastenvood and Senchack (1986) ; Monroe andCohn (1986); Rentzler (1986)). The objective here is to derive the discrete-time optimality conditions for a spread trader maximizing an expected utility function defined over the mean and variance of spread profit. The optimality conditions are found to depend on both statistical parameters and the spreader's propensity towards risk. A number of other useful corollaries are derived and the empirical implications of the optimal spread discussed. Most significantly, it is demonstrated that the optimal 'hedge ratio' is independent of the spreader's attitude towards risk. *This article is based on a portion of the author's Ph.D. thesis. The author would like to thank P. Dhrymes, B. Lehmann, and the referees of this journal for their assistance. The views presented in this paper are solely the author's and are not intended to represent the position of the Bank of Canada.