Futures Spread

A futures spread is a trading strategy that involves simultaneously buying one futures contract and selling a different but related futures contract, profiting from the change in the price difference between the two rather than from an outright directional move in either contract alone. The spread trader is long one leg and short another. Risk is generally lower than an outright futures position because both legs tend to move in the same direction, but the spread itself fluctuates based on supply and demand factors specific to the relationship between the two contracts.

Think of a futures spread like betting on the gap between two runners rather than on either runner winning the race outright.

Calendar Spreads Target the Same Contract Across Time

A calendar spread, also called an intra-commodity spread or time spread, buys a futures contract in one delivery month and sells the same underlying commodity or financial instrument in a different delivery month. The trader profits or loses based on changes in the spread between the near-month and far-month price, not on the absolute direction of the commodity.

A corn trader who buys December corn futures and sells March corn futures has entered a calendar spread. If the December-March spread widens from $0.10 to $0.20, the spread trader profits from that $0.10 widening regardless of whether corn prices rose or fell in absolute terms. These spreads are widely used in agricultural, energy, and financial futures markets.

Inter-Commodity Spreads Trade the Relationship Between Two Products

An inter-commodity spread buys and sells futures on two different but economically related commodities or instruments. Two classic examples are well known to commodity traders by name.

• Crack spread: Buys crude oil futures and sells refined product futures (gasoline and heating oil), representing the refining profit margin. A wide crack spread signals strong refining economics. A narrow one signals compressed margins.
• Crush spread: Buys soybean futures and sells soybean oil and soybean meal futures, representing the processing margin of a soybean crusher. Processors use this spread to lock in their margin before actual crushing.
• TED spread: The difference between U.S. Treasury bill futures and Eurodollar futures, used as a measure of perceived credit risk in the banking system. When the TED spread widens, banks are perceived as riskier relative to the U.S. government.
• NOB spread: Notes over bonds. Trades Treasury note futures against Treasury bond futures, reflecting views on the slope of the yield curve at different maturities.

Inter-Exchange Spreads Exploit Price Differences Between Markets

An inter-exchange spread buys a futures contract on one exchange and sells an economically equivalent or closely related contract on a different exchange. A trader who buys Brent crude on the Intercontinental Exchange and sells West Texas Intermediate crude on the CME Group has entered an inter-exchange spread known as the Brent-WTI spread. The spread reflects transportation costs, quality differentials, and supply-demand dynamics unique to each benchmark grade.

Reduced Margin Requirements Are a Key Advantage

Exchanges and clearinghouses recognize that calendar spreads and closely related inter-commodity spreads carry lower risk than outright positions because the two legs partially offset each other. They charge lower margin requirements for recognized spread positions. A calendar spread in crude oil futures may require only 10% to 30% of the margin needed for an outright position of the same notional size.

This margin efficiency is one reason professional traders, commodity merchants, and hedgers prefer spread strategies. You can take on equivalent exposure at a lower capital cost while keeping risk bounded to the differential between the two legs.

Sources

• https://www.cmegroup.com/trading/why-futures/margin-offsets-for-spreads.html
• https://www.cftc.gov/Consumer-Protection/EducationCenter/index.htm