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Futures Trading Education - Commodity Spread Trading |
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Spreads, also sometimes referred to as switches, is a trading strategy in which speculators attempt to profit from the difference between two different but closely related futures contracts. Spread trades usually have lower margin requirements due to lower risk, however, a spread position may not always have reduce risk. There are three types of futures spreads: Inter-delivery: (also referred to as intra-market or intra-commodity: A spread on the same exchange, in the same commodity, but within different delivery months. For example, long soybeans short soybeans. Inter-market: a spread in the same commodity, but on different exchanges. Typically, these types of spreads don’t receive favorable margins. Inter-commodity: a spread between two different commodities having the same delivery month on the same exchange. For example, Long CBOT Corn short CBOT oats Commodity product spread: A spread between a commodity and products derived from that commodity. The two most common types of commodity product spreads are soybean crushes and energy crack spreads. Soybean Crush: Long soybean futures with short positions in soybean oil and meal futures. Reverse Crush: Short soybean futures with long positions in soybean oil and meal futures. Crack Spread: Utilizes Crude oil futures with opposite positions within unleaded gasoline and heating oil futures. Crush and crack spreads are used by processors to lock in a favorable Gross Processing Margin. The reverse cruch and inverted crack might be used when margins are unfavorable. The Gross Processing Margin GPM) is the difference between the cost of beans (of crude oil) and thre proceeds of the products (bean oil and meal, or heating oil and unleaded gasoline. |
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Revenues of oil and meal |
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- Cost of Soybeans |
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Gross Processing Margin |
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Additionally, There are other types of product spreads such as the spark spread which utilizes electricity and coal futures on the NYMEX, however, these markets tend to be very illiquid. The purchase of near-month contracts against the sale of deferred-month contracts is referred to as a bull spread. The trader expects the near-month price to rise relative to the deferred-month. As the spread narrows (strengthens), the trader profits. One type of bull spread is the limited risk spread, in which the market is a full carrying charge market. A full carrying charge market is one in which the market would pay for someone to buy the commodity and store it until the futures delivery date. Risk is limited because the chance of the deferred-month price moving to a premium greater than full carry is minimal. If this should happen, arbitrageurs would enter the market, quickly bringing the prices back into line. A bear spread is the sale of near-month contracts against the purchase of deferred-month contracts. The trader expects the near month to decline relative to the deferred. This move entails considerably more risk than a bull spread because profit is limited to the widening (weakening) of the spread to a full carry market. The risk of loss is unlimited because any price decline has a limited floor of zero, however, the is no ceiling or cap on prices it they rise. Furthermore, the spot month may not have trading limits. To determine profitable spreading opportunities, calculate the spread: Nearby - deferred = spread |
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Futures Trading | Online Futures Trading | Forex Trading | Managed Futures | Managed Forex |
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© Aaron Trading / AaronFX. All Rights Reserved. |
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