A calendar spread is a trading strategy in that the trader buys and sells two contracts with different expiration dates of the same financial instrument at the same time. This trade is designed to allow the trader to potentially benefit from the difference in price between the two expiration dates.
Trading futures by way of executing a calendar spread is unique in that can either be implemented step by step or simultaneously.
Trade the Difference in Futures Contract Price
Two futures contracts of the same financial instrument, but with different expiration or ‘rollover’ dates usually have current prices that are not the same. This can be attributed to many variables including: seasonality, geopolitical events, earnings season and more.
Below is a chart of two WTI Crude Oil futures contracts (CL) with two different expiration or ‘rollover’ dates:
This difference in price can potentially be used as the basis of a calendar spread futures trading strategy. Each contract that makes up the trading position of being both long and short two different expiration dated contracts is called a ‘leg’.
For example, a trader both buys a near term and sells a futures contract that expires or ‘rolls over’ at a later date. The trader may potentially be able to benefit from the difference in price between the two contracts. The greater the difference in price between the two contracts, the greater the opportunity to benefit from trading futures online.
Hedge Against Futures Contract Price Change
In addition to entering a ‘long’ position, futures traders may also sell a contract of a later expiration date to protect or ‘hedge’ against potential risk. By selling a futures contract after buying or adding a ‘leg’ to their intended position, traders are able to limit the amount of risk they are exposed to.
If the market decreases, a trader could ‘cover’ their position by selling or ‘shorting’ a futures contract of the same financial instrument but of a later expiration date. In addition to hedging against potential downside risk, the trader could potentially benefit from the change in market direction as well.
When trading calendar spreads, it is important to note the risk if the spread moves against your position. Always keep in mind that implementing a calendar spread does not assure a beneficial trade. As with any trading strategy, calendar spreads involve risk that has to be managed. Additionally, as you would be opening a secondary trade to complete the spread, commissions and fees would apply to this trade as well.