Intercommodity Spread
What Is an Intercommodity Spread?
An intercommodity spread is a sophisticated options trade that endeavors to exploit the value differential between at least two related commodities, like crude oil and heating oil, or corn and wheat. A commodity is an important decent utilized in commerce that is exchangeable with different commodities of a similar type.
A trader of intercommodity spreads will go long on one futures market in a given delivery month while simultaneously going short on the connected commodity in a similar delivery month.
Understanding Intercommodity Spreads
Intercommodity spread trading requires information on the dynamics between the different commodities being optioned. For instance, wheat commonly costs more than corn, yet the spread can shift, from maybe 80 pennies to $2 per bushel.
An intercommodity spread trader will know that when the spread among wheat and corn ascends to around $1.50, the reach will more often than not contract, and the price of wheat will drop relative to corn. On the other hand, when the wheat-corn spread river to around 90 pennies for every bushel, the cost of wheat will in general increase relative to corn.
With this information, a trader can go long on wheat and short on corn when the spread is extending. On the other hand, the trader might go long on corn and short on wheat when the spread is limiting. Along these lines, the trader desires to bring in money by accurately foreseeing the price trend.
In this example, the trader isn't worried about the genuine price of every commodity. They are keen on the course and difference in the price.
Types of Intercommodity Spreads
Instances of intercommodity spreads incorporate the crack spread and the crush spread.
Crack Spread
The crack spread includes the simultaneous purchase of futures in crude oil and refined petroleum products, like gasoline and heating oil.
A trader could execute what's known as a 3-2-1 crack spread, meaning three long options on crude oil against two short options on gasoline and one short option on heating oil.
The trader could likewise execute a reverse spread, going long on gas and heating oil, and short on crude oil.
Crush Spread
A crush spread is comparable however generally applies to agricultural commodities. It includes buying simultaneous long and short futures in a raw product, like soybeans, and the crushed and refined crop, for example, soybean oil. For instance, a trader could go long on raw soybeans however sell short on soybean oil futures.
Special Considerations
One advantage of intercommodity trading is they frequently have lower margin requirements than straight futures trades.
The margin is the difference between the total value of protections held in a financial backer's account and the loan amount from a broker, which permits the trader to borrow more and hence make bigger trades. Notwithstanding, leveraged trades can open the trader to greater risk when spreads move in startling bearings and may have catastrophic outcomes.
Features
- This type of trading isn't suggested for unpracticed traders.
- Intercommodity spread trading requires a comprehension of different optioned commodities and the dynamics between them.
- An interc commodity spread is an options trade that endeavors to exploit the value differential between at least two related commodities in the marketplace.
- There are not many types of intercommodity spreads, including one called a crush spread.
