Futures Spread

What Is a Futures Spread?

A futures spread is an arbitrage technique where a trader takes two positions on a commodity to capitalize on an error in price. In a futures spread, the trader finishes a unit trade, with both a long and short position.

Understanding a Futures Spread

A futures spread is one type of strategy a trader can use to search out profit using derivatives on an underlying investment. The goal is to profit from the change in the price difference between two positions. A trader might look to take a futures spread on an asset when they feel there's a possibility to gain from price volatility.

A futures spread requires taking two positions at the same time with various expiration dates to benefit from the price change. The two positions are traded at the same time as a unit, with each side viewed as a leg of the unit trade.

Types of Futures Spreads

Between Commodity Futures Spread: This is a futures spread between two unique, however related commodities with a similar contract month. For instance, a trader who is more bullish on the wheat market than the corn market would buy wheat futures and all the while sell corn futures. The trader profits in the event that the price or wheat increases in value over the price of corn.

Intra-Commodity Calendar Spread: This is a futures spread in a similar commodity market, with the buy and sell legs spread between various months. For example, a trader could buy a March wheat futures contract and sell a September wheat futures contract. On the other hand, the trader could sell a March wheat futures contract and buy a September wheat futures contract.

Bitcoin Futures Spread Trading

Bitcoin futures started trading in December 2017. These futures products offer an opportunity for a futures spread to benefit from price volatility. A trader who accepts a price will go up over the long haul can take a buy contract one month out and a sell contract two months out at a higher price. They exercise their option to buy in the one-month contract and afterward sell in the two-month contract, benefiting from the differential.

Futures Spread Trading Margins

Margins are lower for futures spreads than for trading a single contract due to reduced volatility. On the off chance that an outer market event happens, for example, a surprise interest rate movement or psychological militant attack, both the buy and sell contracts, in theory, ought to be impacted similarly — e.g., the gain on one leg counterbalances the loss on the other.

A futures spread successfully gives a hedge against systematic risk, permitting exchanges to reduce the margins for spread trading. For instance, the Chicago Mercantile Exchange (CME) has a $1,000 margin requirement for one contract of corn, while it has a $140 margin requirement for similar crop year futures spread.

Viable Example of a Bull Futures Spread

Assume it's December, and David is bullish on wheat. He buys one contract of March wheat at 526'6 and sells one contract of September wheat at 537'6, with a spread of 11'0 between the two months (526'6 - 537'6 = - 11'0).

David buys March wheat and sells September wheat on the grounds that front months normally outperform deferred months. David called the market accurately and, by March, the spread between the two months has limited to - 8'0, meaning he has created gain of 3'0 (- 11 + - 8). Since one contract is for delivery of 5,000 bushels of wheat, David creates a gain of $150 on the spread trade (3 pennies x 5,000).

Features

• A between commodity spread uses futures contracts in various, yet closely related commodities with a similar contract month.
• A futures spread is an arbitrage technique wherein a trader takes offsetting positions on a commodity to capitalize on an error in price.
• An intra-commodity calendar spread utilizes contracts of similar commodity, searching for errors between various months or strikes.