Understanding Futures Spreads

Futures Spread

Spreading is a popular trading strategy in which you simultaneously buy one contract and sell another. The trading approach is used across asset classes including futures.

One reason spreading is widely used is that can help reduce risk versus placing an outright futures trader. Because of the potential reduction in risk, spread trades may also have lower margin requirements. Please be aware that spread trading does not eliminate market risk and potentially substantial losses.

Watch this 2-minute video to learn more about future spreads –

Types of Futures Spreads

  1. Intramarket Spreads: Also known as Calendar Spreads, this approach involves buying a futures contract in one month while simultaneously selling the same contract in a different month.

    One example would be buying the March 2022 Euro Dollar futures contract and selling the March 2024 Euro Dollar futures contract at the same time.

    Calendar spread traders are primarily focused on changes in the relationship between the two contract months.

  2. Intermarket Spreads: This strategy involves simultaneously buying and selling two different, but related, futures within the same contract month. These traders are focused on the relationship between the two products.

    For example, an intermarket spread is a widely used approach to trade on the relationship between the gold and silver future prices.

  3. Commodity Product Spreads: This approach involves simulations buying and selling futures contracts that are related in the processing of raw commodities.

    For example, the soybean crush involves buying soybean futures and selling soybean meal and soybean oil futures.

Soybean Crush Spread

Participants in this spread strategy are able to simulate the financial aspects of soybean processing. Buying soybeans, crushing them and then selling the resulting soybean meal and soybean oil products, hence the name, The Soybean Crush.

The spread allows processers to hedge their price risks. While traders will look at the spread to capitalize on potential profit opportunities.

Spread Margins

One of the attractions of spread trading is the relatively lower risk versus outright futures positions and the subsequent lower futures margins.

Assume the outright margin for soybeans futures is at $3,000 and the outright margin for corn futures is $1,500. Rather than posting $4,500 to trade a spread on these two contracts, a trader rather receives a 75% margin credit. In other words, the initial margin would be $1,125 which reflects the lower risk in spreading the two contracts as opposed to trading each of them outright.

There are many spread strategies that allow a market participant to manage risk and capitalized on potential trade opportunities. To learn more, sign up for our free educational futures webinars.

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