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| I am dedicated to futures and options training and I work with clients that have
infinitely diverse levels of experience and trading styles Not only beginners that have never traded, but also well seasoned individuals interested in becoming better traders. In this article I am going to talk about
futures spread trading |
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| Intracommodity Spread |
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| A Intracommodity Spread is buying and selling the same future contract with different corresponding months. A intracommodity spread is generally less risky than a intercommodity spread and generally has a smaller margin. The reason being if a commodity goes up or down the corresponding months of that commodity will also go up or down in different proportions. Both the intracommodity spread and the intercommodity spread have unlimited risk with unlimited potential. I am going to give an example of an intracommodity spread and than talk about hypothetical profits and losses. |
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| Example: |
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| Buying February Lean Hogs and selling April Lean Hogs. The reason why I picked Lean Hogs is because there is alot of intracommodity
spreading that goes on in this futures contract. The commodity is the same, Lean Hogs. The months are different, February vs. April. Let's say February Lean Hogs
are trading at 7600 and April Lean Hogs are trading at 7500. The front month is February since February is closer to expiration than April. If the front month in
Lean Hogs is trading at a premium to the deffered months this is generally considered a bull market. Since this is a sign of a bull market you place a trade to buy a
February Lean Hog and sell a April Lean Hog at a 100 point premium to the February Lean Hog Side. You always put the premium on the higher priced side. If you get filled,
you would be long February Lean Hogs and short April Lean Hogs at a 100 point premium to February Lean Hogs, you want this spread to widen for you to make money. Every point in Lean Hogs is $4.00. |
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| Profitable Trade: |
| The February Lean Hogs are trading at 7700 and the April Lean Hogs are trading at 7500. The difference in the prices of the 2 different months in
Lean Hogs are 200 points premium to February Lean Hogs. Since you put this spread on at a 100 point premium to February Lean Hogs and the spread widened to 200 point premium
to February Lean Hogs, you would be up +$400(100 points x $4.00 per point.) |
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| Nonprofitable Trade |
| The February Lean Hogs are trading at 7600 and the April Lean Hogs are trading at 7600. The difference in the prices of the 2 different months are the same, otherewise
reffered to as Even $. Since you put the spread on at a 100 point premium to the front month side, February Lean Hogs, and the spread tightened to Even $.
You would be down -$400(100 points x $4.00 per point.)
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| Intercommodity Spread |
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| A Intercommodity Spread is buying and selling different future contracts with the same month or different months. A intercommodity spread is generally
more risky than an intracommodity spread and generally has a higher margin. The reason is because we are dealing with 2 different commodities. The effect
of one commodity does not necessarily have a direct affect to the other commodity. It could be the opposite effect. I am going to give an example of a
intercommodity spread and talk about the hypothetical profit or losses. |
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| Example: |
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| Buying February Lean Hogs and selling February Live Cattle. I am going to stick with meat vs. meat, since it will be a little easier to explain. Both Live Cattle and Lean Hogs are $4.00 per point.
The commodity is different Lean Hogs vs. Live Cattle. We are going to stick with the same month, but you could do different months also. Let's say February Lean hogs are trading at 7600 and
February Live Cattle are trading at 8600. You believe in the next month we are going to see much better demand for Beef rather than Pork. You enter the spread to buy February Live Cattle and sell
February Lean Hogs at 1000 point premium to the February Live Cattle side. Since February Live Cattle is higher priced than February Lean Hogs you have to place the
premium on the buy side, the higher priced side. In order for you to make money on this spread you
will need this spread to widen to higher than 1000 point premium to February Live Cattle.
Every point on this spread is $4.00. |
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| Profitable Trade: |
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The February Live Cattle are trading at 9000 and the February Lean Hogs are trading at 7000. The difference in the prices of the 2 different commodities with the same corresponding month is 2000 points.
Since you put this spread on at a 1000 point premium to February Live Cattle and the spread widened to 2000 point premium to February Live Cattle, you would be up +$4000(1000 points x $4.00 per point.)
Pat yourself on the back, because you were right there was stronger demand for Beef compared to Pork over the last month.
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| Nonprofitable Trade |
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The February Live Cattle are trading at 8000 and the February Lean Hogs are trading at 7500. The difference in the prices of the 2 different commodities with the same corresponding month is 500 points.
If you put this spread on at a 1000 point premium to February Live Cattle and this spread tightened to 500 points premium to February Live Cattle, you would be down -$2000(500 points x $4.00 per point.)
The fast food chains had a promotion on the Bacon, Egg, and Cheese Biscuit.
Unfortunately the demand for Pork outgained the demand for Beef over the last month.
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I hope this brief introduction to futures spreading has been
helpful to you. Please feel free to contact me with your questions.
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John Garrity |
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