A futures spread consists of two positions in the futures market. It can be different commodities or different months but the same commodity. The goal is to take advantage of variations in prices between the two contracts. The futures spread trading strategy is set up with a long and a short position. An advantage of this arbitrage technique is that margins are lower on spreads than on trading a single contract. That is because market events tend to have the same directional effect on both contracts in the spread.

Commodity Futures Spread Trading

Commodity futures spread trading is a lower risk way to trade the commodity futures market. Commodity futures spread trades have less sensitivity to the market than single position trades, require lower margins, and are always quoted at one price, not prices for both positions. The single price is calculated by subtracting the back month from the trade’s front month. Because of the lower risk and conservative nature of this approach, commodity futures spread trading can be a better way for beginners in day trading commodities.

Futures Calendar Spread Trading

Calendar spreads are used in both options and futures trading. The trade is set with two contracts for different dates but the same commodity and same strike price. A common approach is to buy the longer term contract and sell the shorter term contract. The goal is to profit from the price differential as this trade plays out. This strategy is used to minimize the effects of time on the trade and is most profitable when the underlying commodity or other asset does not move significantly until after the first (sold) contract expires.

Butterfly Spread Futures Trading Strategy

The butterfly spread is a strategy designed to profit when a commodity or other asset does not change much in price over the time frame of the various contracts in the strategy. A typical butterfly spread futures trade would be to buy a near-term contract, sell two medium-term contracts, and buy one long-term contract. This is the sort of trade a corn farmer might set up just prior to planting when he or she expects a bumper crop which will provide an excellent yield but will also drive down prices as the crops come in. Market timing is important when using a butterfly spread in trading commodities.

Index Futures Spread Trading

The CME Group explains index spreads. Whereas spreads are strategies where one buys and sells futures contracts at the same time and within the same trade, index futures spread trading is the application of this approach to index futures rather than individual stocks or commodities. Thus an index futures spread trading strategy would seek to profit from changes in the S&P 500 or the Bloomberg Commodity Index. With this approach a trades seeks to avoid risks associated with individual commodities or stocks and trade on the broader factors that drive the markets.

Spread Trading Futures Example

A commodity trader can use spread trading to profit from price differentials of a given commodity month to month or different commodities over the same time frame. When a trader is bullish on the price of wheat and bearish on the price of corn their spread trade would consist of buying wheat futures and selling corn futures. The trader profits when his or her expectation turns out to be true. Likewise, a trader who expects corn prices to fluctuate may choose to see corn futures in the spring and purchase for the fall.

Futures Spread Trading Platform

At DayTradeSafe we recommend NinjaTrader as a futures spread trading platform and for all commodity, stock, options, and Forex trading. This exceptional platform gives you real-time futures data, advanced charting options, an excellent trade simulator, the ability to do back testing and strategy development, and the ability to connect to not only the NinjaTrader Brokerage but also online brokers like TD Ameritrade, Interactive Brokers, and others.

Crude Oil Futures Spread Trading

As the price of oil fluctuates traders seek to profit using a low-cost strategy. This is crude oil futures spread trading. Traders will commonly follow a calendar spread approach by selling futures for the short term and buying for the long term. The same indicators that help with day trading can be used to help set up these trades although the indicators should be set for appropriate time-frames.

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