Understanding Futures Spreads – NinjaTrader Blog

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Spreading is a popular trading strategy in which you buy one contract and sell another at the same time. The trading approach is used for all asset classes including futures.

One reason spreading is widespread is because it can reduce the risk compared to placing a direct futures trader. Because of the potential for risk reduction, spread trades can also have lower margin requirements. Please note that spread trading does not eliminate market risk and potentially significant losses.

Watch this 2 minute video to learn more about future spreads –

Types of Futures Spreads

  1. Intra-market spreads: Also known as calendar spreads, this approach is to buy a futures contract in one month and sell the same contract in another month at the same time.

    An example would be the purchase of the euro-dollar futures contract from March 2022 and the simultaneous sale of the euro-dollar futures contract from March 2024.

    Calendar spread traders primarily focus on changes in the relationship between the two contract months.

  2. Intermarket spreads: This strategy involves buying and selling two different but related futures at the same time within the same contract month. These distributors focus on the relationship between the two products.

    For example, an intermarket spread is a widely used approach to trading the relationship between gold and silver futures prices.

  3. Commodity Product Spreads: This approach includes simulations of buying and selling futures contracts related to the processing of commodities.

    For example, soybean crush involves buying soybean futures and selling soybean meal and soybean oil futures.

Soybean Crush Spread

Participants in this spread strategy can simulate the financial aspects of soybean processing. Buying soybeans, chopping them up, and then selling the resulting soybean meal and soybean oil products, hence the name The Soybean Crush.

The spread enables processors to hedge their price risks. While traders look at the spread to take advantage of potential profit opportunities.

Spread margins

One of the charms of spread trading is the relatively lower risk compared to outright futures positions and the resulting lower futures margins.

For example, suppose the total margin for soybean futures is $ 3,000 and the total margin for corn futures is $ 1,500. Rather than posting $ 4,500 to trade a spread on these two contracts, a trader is more likely to receive 75% margin credit. In other words, the initial margin would be $ 1,125, which reflects the lower risk involved in spreading the two contracts as opposed to trading either of them directly.

There are many spread strategies that allow a market participant to manage risk and take advantage of potential trading opportunities. To learn more, sign up for our free future education webinars.

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