Understanding Futures Calendar Spreads

Spreads are a useful component of every trading strategy, regardless of whether you are a hedger or an aggressive speculator. Spreads provide a number of benefits to anyone actively seeking market share, including much lower margin requirements and decreased risk exposure.

Trading futures calendar spreads is one way to profit from this market. Calendar spreads are a good technique to participate in the futures markets if you have the resources.

What Is a Calendar Spread

Calendar spreads, sometimes referred to as intramarket spreads, are when a trader concurrently purchases and sells the same futures contract in various months of expiration. Depending on the stance adopted in the near-month contract, calendar spreads can be implemented in a bullish or bearish manner.

An energy trader might execute a bullish calendar futures spread in West Texas Intermediate (WTI) crude oil, as seen in this example: They purchase a single quantity of WTI  crude oil in January 2020 and simultaneously sell a single quantity of June 2020 WTI crude oil.

The futures trader has carried out a calendar spread trade by simultaneously initiating long and short positions in the same market with separate contract months. Either self-directed or broker-assisted, the process can be regularly finished with little effort.

Form and Function of Futures Calendar Spread Trading

With little risk and financial investment, the trader can turn a return. Let’s examine the advantages of his bull spread strategy:

Minimal Risk: The low risk exposure is one of the most alluring features of trading futures calendar spreads. Extremely bullish or bearish movements in asset pricing aren’t always harmful because the market is occupied by both active long and short positions. A trader can prevent capital loss as long as the various contract months move in unison.

Less Margins: Spread margin requirements are significantly lower than those for trading regular futures contracts. For example, WTI crude oil typically requires $4,000 to be held through the daily electronic closure and $1,000 in margin to be traded intraday. On the other hand, depending on the spread’s duration and structure, trading WTI spreads can be done with as little as $100 in margin money.

Opportunity: Intramarket volatility might yield sizable gains, depending on the product. The trader can turn a profit in a number of ways. First, the long position’s gains will exceed the short position’s losses if the January contract rallies more than the June contract. On the other hand, the short position’s gains will outweigh the open long’s losses if the June issue drops more than the January contract. Gains will be made on both legs of the spread if contract prices diverge; a loss will be incurred if they converge.

Conclusion

Trading futures calendar spreads is an excellent approach for a broad range of market participants. Spreads are reasonably priced due to their low risk and lower margin needs. Additionally, they have a wide range of uses for producer hedging, particularly in the context of agricultural commodities.

Calendar spreads are one of the three main categories of futures spreads, along with intermarket and commodity product offerings. Each has its own distinct shape, purpose, and set of benefits.