SPREAD TRADING DEEP DIVE
Plain English
Spread trading is simultaneous buy/sell in related futures contracts to profit from the price relationship changing — not from directional moves. It's lower margin, often less volatile than outright positions, and allows you to express relative value opinions. Professionals love spread trading.
Going deeper
Types of futures spreads: (1) Calendar Spreads — same commodity, different expiration months (front vs. back). (2) Inter-Commodity Spreads — related commodities (crack spread: crude oil vs. refined products; spark spread: natural gas vs. electricity; crush spread: soybeans vs. meal + oil). (3) Intermarket Spreads — same commodity on different exchanges (WTI vs. Brent). (4) Legged vs. Ratio Spreads — some spreads require different quantities of each leg. Exchange-recognized spreads receive reduced margin requirements, making them capital-efficient. Spread P&L depends on the differential moving in your favor, not the absolute price level. This removes systematic (market-direction) risk, isolating relative value. Platforms like Sierra Chart and NinjaTrader display spreads as single instruments.
Examples
Crack Spread
The crude oil to gasoline crack spread measures refinery profitability. Buy RBOB gasoline futures, short crude oil. If refinery margins improve (gasoline prices rise more than crude), the spread widens and the trade profits — regardless of whether crude goes up or down.
Soybean Crush Spread
Buy 10 soybean contracts, sell 12 soybean meal contracts and 9 soybean oil contracts (approximate ratio). This replicates the processing margin of a crush facility. When crush margins (processor profitability) are compressed, buy the spread; when rich, sell it.