Strategy · Spread Trading

INTER-COMMODITY SPREADS

NeutralDefined riskAdvanced

Overview

Trading the price relationship between two related but different commodities. Examples: crude oil vs. gasoline (crack spread), corn vs. wheat, gold vs. silver ratio.

Setup

1.Buy one commodity futures contract.
2.Sell a related commodity futures contract.
3.Monitor the historical spread relationship.

Max profit

Depends on the spread returning to or extending from historical norms.

Max loss

Can be large if the relationship breaks down permanently.

Breakeven

Entry spread value.

When to use

When two historically correlated commodities have diverged from their normal relationship.

When to avoid

When fundamental changes justify the new spread relationship (structural break, not temporary).