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Home / Futures Blog / What Exactly Are Futures Spreads

What Exactly Are Futures Spreads

April 16, 2014 by Peter O'Daniel

If a new trader is looking to use futures to earn speculative profits, an understanding of spreads relationships is essential. A futures spread is simultaneously being long a futures contract and being short a different futures contract. One can either trade a futures spread in the same commodity with different months, known as an intra-commodity spread or calendar spread (like July vs Dec Corn), or trade a futures spread between two different commodity markets, known as an inter-commodity spread (like Corn vs Wheat).

Many traders get confused on how futures spreads are quoted compared to the outright futures contracts in a particular commodity. If trading an exchange listed inter-commodity spread (two different commodities like Corn vs Wheat), the quote will be the difference between the prices of the two commodities that the trader is spreading (Corn Price – Wheat Price). Which commodity comes first in the equation varies on the inter-commodity spread being traded, but this is something your Daniels Trading broker can quickly help you figure it out.

STRATEGIES USING COMBINATIONS OF POSITIONS, SUCH AS SPREAD AND STRADDLE POSITIONS MAY BE AS RISKY AS TAKING A SIMPLE LONG OR SHORT POSITION.

Every intra-commodity spread involves being long one contract maturity and short another. Keep in mind an intra-commodity futures spread is always quoted as the front month minus the back month. For example, if a trader was spreading May 14 Corn and September 14 Corn, the trader would simply subtract the September corn price from the May corn price to get the current price of the spread. So, for example, if the trader is selling the May corn contract and buying the September corn contract, the market price would be the May bid minus the September offer. Ultimately, even though futures spreads are made up of two individual futures contracts, they are quoted as the difference between the two, resulting in one bid/ask for the spread.

To get a visual of spread pricing, let’s take a look at the Depth of Markets for May corn, September corn, and the May/September corn spread below. Notice that the bid/ask for the spread is -0.0100/-0.0075. As mentioned previously, the bid/ask is calculated by subtracting the September corn price from the May corn price. So if a trader sold the May 14/September 14 corn spread at the market, they would be filled at the current bid of -0.0100. While this can easily be seen on the Depth of Market of the spread (bid is highlighted in green), it can also be calculated by subtracting the current asking price of September corn (5.0850) from the current bid of May corn (5.0750).

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The Depth of Markets above came from our dt Pro trading platform, which provides all of the necessary features for futures spread trading. These features include:

  • Spread Order Entry
  • Spread Depth of Market
  • Spread Charting
  • Spread Margin Calculator

To learn more about the new futures spread trading features on dt Pro, I encourage you to watch our webinar, Trade Futures Spreads on DT Pro.

One convenience of trading futures spreads is that the contract specifications are exactly the same as the outright futures contract. For example, the Depth of Markets above show that the tic values are 0.0025 cents for May corn, September corn, and the May/September corn spread. Also, notice that the bids and offers on the Depth of Markets above show that the liquidity for the May/September corn spread is very similar, if not better, than the outright May (front month) corn contract. More liquidity can often be found in futures calendar spreads versus the outright futures contracts, whether one is trading spreads in the energies, grains, or livestock markets.

Another benefit to trading futures spreads is that the exchange typically offers reduced margin rates for spreads, because spreads can potentially reduce the volatility of the market being traded and remove systemic risk from the trade. Despite these exchange policies though, spreads can often be as risky as an outright futures contract. To learn more about the benefits of trading futures spreads, you can discuss futures spread with your Daniels Trading broker or you can call me at 312.706.7633.

STRATEGIES USING COMBINATIONS OF POSITIONS, SUCH AS SPREAD AND STRADDLE POSITIONS MAY BE AS RISKY AS TAKING A SIMPLE LONG OR SHORT POSITION.

Risk Disclosure

STRATEGIES USING COMBINATIONS OF POSITIONS, SUCH AS SPREAD AND STRADDLE POSITIONS MAY BE AS RISKY AS TAKING A SIMPLE LONG OR SHORT POSITION.

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

Filed Under: Uncategorized

About Peter O'Daniel

Whether you are a novice trader looking to learn more about the futures markets or a seasoned trader looking for the latest and greatest trading software, Peter O’Daniel has the necessary skills to assist traders of all levels. Peter utilizes a number of resources to help his clients learn the trading software to gain confidence and comfort before trading the commodity futures and options markets.

Peter received his B.A. from Indiana University and has a strong interest in commodity futures markets. The quick moves and constant changes of the commodity markets in response to different technical and market fundamentals is what sparked Peter’s interest in finding a career in futures.

Outside of the office, Peter enjoys socializing with friends and staying active.

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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