Simply put, spreads are priced as the difference between the two contracts you are looking to trade.
For example, the September crude oil contract (front month) is trading at $48.70 and the December crude oil contract (deferred month) is trading at $49.11. The spread price would be…
$48.70 - $49.11= -$.41
Now if you trade options, you should realize that this does not represent a $.41 credit or debit, but rather a discount or a premium.
When pricing futures spreads, you always take the front month and subtract out the deferred month.
Futures Spread Tick Values
Generally, the tick values for spreads as the same as they are for individual contracts. There are a couple caveats (i.e. when rolling E-mini S&P contracts or NOB spreads, the tick values may be less - to help minimize the cost of rolling positions), but for the most part, the tick values are the same.
Seasonality In Futures Spreads
Because many of the commodity markets have seasonal periods of supply and demand, some prices are higher during the summer (things like gasoline, crude oil), while others have a higher demand in winter (things like natural gas, heating oil, and coffee).
Then there are other products like any of the grains (corn, soybeans, or wheat) that have seasonality in fall because of the harvest, which can lead to lower prices at that time of year.
The main reason to trade spreads as opposed to outright futures is that it limits your exposure to systemic risk (outside factors that can impact commodity prices).
Let’s look at an example of how create a spread trade can limit exposure from market fluctuations that are a product of the systemic risk.
If you were to buy a crude oil future (/CL), you had to put up cash (as margin) to attain that position. Because the /CL contract is priced in US dollars, you’re not just long /CL, you’re technically short the USD. Technically, you would have a CL/USD cross position.
By trading a long /CL contract with a short /CL contract (thus creating a futures spread), you are effectively hedging out the USD. Let’s take this a little further…
If Greece were to default on their bonds (therefore sending Europe into a tailspin), the USD would go up materially. This rise of the USD would put pressure on crude oil, driving the price of /CL down. If you were long /CL, there is no hedge against this systemic risk.
To offset this risk, you could have created a spread with /CL using a deferred month contract, or, created a spread using another market.
Strategies: Futures Spreads
Products Discussed In This Episode: N/A
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.