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3 Benefits Of Futures Spread Trading

November 27, 2019 by Daniels Trading| Tips & Strategies

Futures spread trading is a unique discipline that offers many benefits to practitioners. Featuring reduced margin requirements, extensive strategic applications, and limited exposure to systemic risk, spread trading is viewed by many traders as a premier financial strategy.

Limited Systemic Risk Exposure

Aside from being a catch-all term, risk comes in a variety of forms. Financial, currency, and commodity risks are several that are common in the futures market. However, systemic risk—the danger of a market-wide or sectoral meltdown—is the type that most concerns traders and investors. In futures, systemic risk is the possibility of an asset class experiencing a crash in pricing.

Those involved in futures spread trading can largely avoid systemic risk by simultaneously buying and selling related contracts. A spread consists of two offsetting positions, known as legs, that mitigate exposure to either the bullish or bearish side of the market.

The mechanics of a spread are very different from those of outright futures. In the case of outrights, rising and falling prices directly impact P&L and boost risk exposure. For spreads, a position’s upside and downside risks are essentially covered. Therein lies the crux of spread trading: Dramatic spikes or plunges in asset pricing have a negligible impact on the spread’s aggregate value. What really matters is the pricing of each leg relative to the other.

Strategic Alternatives

In practice, traders may use different futures spread trading strategies to produce consistent returns. However, all of these strategies fall into one of these categories:

  • Intramarket: Also known as calendar spreads, intramarket spreads involve the buying and selling of the same contract with different months. For instance, if you bought one lot of January 2020 WTI crude oil and sold one lot of March 2020 WTI, you would be executing an intramarket WTI spread trade. Intramarket spreads are regularly used by long-term traders to manage futures contract rollover and extend their investment horizon.
  • Intermarket: Intermarket spreads are executed by buying and selling two different-but-related products with the same expiration dates. A common example of an intermarket spread trade is to buy December corn and sell December wheat. This wheat/corn spread offers producers insulation from erratic commodity prices and gives speculators an opportunity to profit from market variations.
  • Commodity: Commodity spreads are executed by buying contracts that pertain to the processing and manufacturing of raw materials. To execute, a trader buys the underlying commodity contract and sells the manufactured product. As an example, assume that Erin the energy trader buys one contract of January 2020 WTI crude oil while simultaneously selling one contract of January 2020 RBOB gasoline. Erin will profit from the trade if the two legs of the spread converge (rising WTI and falling RBOB prices).

Countless intramarket, intermarket, and commodity spread strategies exist, and they offer interested parties many opportunities. For those seeking trading/investment alternatives, few instruments match the versatility of spreads.

Reduced Margin Requirements

Due to the limited risk exposure, futures spread trading furnishes participants with vastly reduced margin requirements. Trading futures outright can be capital intensive; spreads are typically offered at a fraction of the financial commitment.

To illustrate this point, let’s examine the margin requirements for a CL Light Sweet Crude Oil intramarket futures spread:

  • Spread: For the December 2019/January 2020 listing, maintenance margin requirements are $350.
  • Outrights: To execute each leg of the December 2019/January 2020 spread using outrights, the maintenance margins of each leg are $4,350 and $4,200. A total of $8,550 is needed to execute the trade.

In the example above, the diminished margin requirements of the spread are a direct reflection of the much smaller risk exposure. This is a big advantage to the trader because opening new positions in the market requires only a minimal capital outlay.

Adding Futures Spread Trading to Your Financial Plan

For more than 20 years, the team at Daniels Trading has specialized in helping individuals achieve their financial goals via standard futures, options, and futures spread trading. To learn whether spreads are right for you, take advantage of Daniels Trading’s second-to-none service suite and schedule your free, no-obligation consultation today.

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Filed Under: Tips & Strategies

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

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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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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