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).
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.
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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.
This material is conveyed as a solicitation for entering into a derivatives transaction.
This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.
Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.
You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.
