Futures Spreads Explained

A futures spread is a position that is long one futures contract and short a related one at the same time. Instead of betting on the outright price, the trader bets on the price difference between the two. Futures spreads are central to commodity and interest rate markets: exchanges list them as tradable products, give them lower margins and publish their prices. The broader idea of spread trading across all markets is in Spread Trading.

Types of futures spreads#

Why trade spreads#

• Lower risk: the two legs offset much of the market's overall movement.
• Lower margin: exchanges recognise spread risk is smaller. A calendar spread in corn may require a fraction of the margin of an outright position. See Futures Margin: Initial and Maintenance.
• Specific views: spreads isolate one relationship, such as tight near term supply or a widening WTI Brent gap.
• Seasonality: many spreads follow seasonal patterns linked to harvests, weather and demand. See Seasonality in Commodities.

Quoting and direction#

Spreads are usually quoted as the first leg minus the second.

• Buying the spread: buy the first leg, sell the second. Profits if the spread widens (first leg rises relative to the second).
• Selling the spread: sell the first leg, buy the second. Profits if the spread narrows.

Ratio spreads#

When the two legs differ in size or value, traders use ratios to balance them:

• Gold silver: a gold contract (100 ounces) is worth far more than a silver contract (5,000 ounces at a much lower price), so traders may use several silver contracts per gold contract.
• Crack spreads: 3:2:1 means three crude contracts against two gasoline and one heating oil. See Crack Spreads.
• Yield curve spreads: weighted by DV01 so that each leg has the same sensitivity to rate changes. See DV01.

Exchange listed spreads#

Exchanges list many spreads as single instruments with their own order books. Trading a listed spread avoids leg risk (one leg filling while the other moves) and usually gets better prices than trading legs separately.

Risks#

• Spreads can move sharply, especially near expiry or during supply shocks.
• Correlations can break, for example when a pipeline outage separates two related prices.
• Liquidity differs between legs; deferred months can be thin.
• Low margin invites over sizing.
• Delivery and expiry dates differ between legs. See First Notice Day and Last Trading Day.

How traders analyse spreads#

• Historical ranges and seasonality of the spread.
• Fundamentals: inventories, transport costs, processing margins.
• Carry and curve shape for calendar spreads. See Contango.
• Charts of the spread itself, not the outright prices.

Frequently asked questions#

What is a futures spread?#

A position that is long one futures contract and short a related one, profiting from changes in the price difference between them.

Why is margin lower for futures spreads?#

Because the two legs offset each other's risk, exchanges charge less margin than for two separate outright positions.

What is an inter commodity spread?#

A spread between two different but related commodities, such as gold and silver or corn and wheat.

Next, focus on spreads between months in Calendar Spreads in Futures.