Intermarket Spread
What Is an Intermarket Spread?
An intermarket spread is a arbitrage strategy for trading different connected instruments in the commodity futures market. Utilizing this method, a trader places orders for the simultaneous purchase of a commodity futures contract with a given expiration month and furthermore sells similar expiration month of a futures contract in a closely related commodity (e.g., purchase crude oil futures to sell gas futures). The goal is to profit from the relative changes in the gap, or spread, between the two futures commodity prices.
Understanding the Intermarket Spread
The intermarket spread strategy utilizes one exchange stage to complete the spread. A futures spread strategy includes trading a long position and short position, or the legs, simultaneously. The thought is to moderate the risks of holding just a long or a short position in the asset.
These trades are executed to create an overall net trade with a positive value called the spread. An intermarket spread includes setting long futures of one commodity and short futures of one more product in which the two legs have a similar expiration month.
A commodity futures contract is an agreement to buy or sell a predetermined amount of a commodity at a specific price on a specific date from here on out.
An illustration of an intermarket commodity futures spread is in the event that a trader purchases May Chicago Board of Trade (CBOT) feed corn contracts and simultaneously sells the May live dairy cattle contracts. The best profit will come on the off chance that the underlying price of the long position increments and the short position price falls. Another model is to utilize the CBOT stage to buy short contracts for April soybean and long contracts for June corn.
The Risks of Intermarket Spread Trades
Trading utilizing spreads can be safer on the grounds that the trade is the difference between the two strike prices, not a outright futures position. Likewise, related markets will generally move in a similar course, with one side of the spread impacted more than the other. Be that as it may, there are times when spreads can be as unstable.
Knowing the economic fundamentals of the market, including seasonal and historical price designs, is essential. Having the option to perceive the potential for spread changes can be a differentiator too.
The gamble is that the two legs of the spread move the other way of what the trader might have expected. Likewise, margin requirements will generally be lower due to the more gamble opposed nature of this arrangement.
Illustration of Intermarket Spread
The "crack spread" alludes to the intermarket spread between a barrel of crude oil and the different petroleum products refined from it. The "crack" alludes to an industry term for breaking separated crude oil into its part products. This incorporates gases like propane, heating fuel, and gas, as well as distillates prefer stream fuel, diesel fuel, lamp oil, and oil.
The price of a barrel of crude oil and the different prices of the products refined from it are not generally in perfect synchronization. Contingent upon the season, the climate, global supplies, and numerous different factors, the supply and demand for specific distillates brings about pricing changes that can impact the profit margins on a barrel of crude oil for the purifier. To alleviate pricing risks, purifiers use futures to hedge the crack spread. Futures and options traders can likewise utilize the crack spread to hedge different investments or hypothesize on potential price changes in oil and refined petroleum products.
As an intermarket spread trader, you are either buying or selling the crack spread. Assuming you are buying it, you expect that the crack spread will reinforce, meaning the refining margins are developing since crude oil prices are falling or potentially demand for refined products is developing. Selling the crack spread means you expect that the demand for refined products is debilitating or the spread itself is tightening due to changes in oil pricing, so you sell the refined product futures and buy crude futures.
Different Commodities Product Spread Strategies
Different types of commodity spread strategies incorporate intra-market spreads and between exchange spreads.
Intra-Market Spreads
Intra-market spreads, made exclusively as calendar spreads, means a trader is in long and short futures in a similar underlying commodity. The legs will have a similar strike price however terminate in various months. An illustration of this would be an investor going long in January soybean and short in July soybean.
Between Exchange Spreads
A between exchange spread involves contracts in comparative commodities, yet on various exchange platforms. They can be calendar spreads with various months, or they can be spreads that utilization a similar expiration month. The commodities might be comparable, yet the contracts trade on various exchanges. Getting back to our model over, the trader will purchase the May CBOT feed corn contracts and simultaneously sell the May live steers on the Euronext. Notwithstanding, traders need the authorization to trade products on the two exchanges.
Features
- The crack spread, utilized in the oil futures markets, is a common intermarket spread strategy between crude oil and its refined products.
- A trader who executes a between exchange spread trades contracts in comparative commodities on various exchange platforms.
- A trader who executes an intra-market spread trades calendar spreads and is in long and short futures in a similar underlying commodity.
- An intermarket spread alludes to the price differential between two closely related commodities futures contracts.
- Traders can utilize an intermarket spread strategy by simultaneously buying and selling such closely related contracts, accepting that the spread will extend or fix.
