What Is an Intermarket Spread?
An intermarket spread is an arbitrage scenario for trading various correlated instruments in the commodity futures market. Using this method, a trader places orders for the concurrent purchase of a commodity futures contract with a given expiration month and also sells the same expiration month of a followings contract in a closely related commodity (e.g., purchase crude oil futures to sell gasoline futures). The goal is to profit from the relevant changes in the gap, or spread, between the two futures commodity prices.
- An intermarket spread refers to the price differential between two closely mutual commodities futures contracts.
- Traders can employ an intermarket spread strategy by simultaneously buying and selling such closely agnate contracts, believing that the spread will widen or tighten.
- The crack spread, used in the oil futures markets, is a banal intermarket spread strategy between crude oil and its refined products.
- A trader who executes an inter-exchange spread trades bargains in similar commodities on different exchange platforms.
- A trader who executes an intra-market spread trades calendar spreads and is in big and short futures in the same underlying commodity.
Understanding the Intermarket Spread
The intermarket spread strategy uses one quid pro quo platform to complete the spread. A futures spread strategy involves trading a long position and short position, or the supports, simultaneously. The idea is to mitigate the risks of holding only a long or a short position in the asset.
These trades are offed to produce an overall net trade with a positive value called the spread. An intermarket spread involves placing elongated futures of one commodity and short futures of another product in which both legs have the same expiration month.
A commodity approaches contract is an agreement to buy or sell a predetermined amount of a commodity at a specific price on a particular date in the future.
An example of an intermarket commodity comings spread is if a trader purchases May Chicago Board of Trade (CBOT) feed corn contracts and simultaneously sells the May survive cattle contracts. The best profit will come if the underlying price of the long position increases and the short fix price falls. Another example is to use the CBOT platform to buy short contracts for April soybean and long contracts for June corn.
The Jeopardizes of Intermarket Spread Trades
Trading using spreads can be less risky because the trade is the difference between the two cudgel prices, not an outright futures position. Also, related markets tend to move in the same direction, with one side of the spread stricken more than the other. However, there are times when spreads can be as volatile.
Knowing the economic fundamentals of the trade in, including seasonal and historical price patterns, is essential. Being able to recognize the potential for spread changes can be a differentiator as familiarly.
The risk is that both legs of the spread move in the opposite direction of what the trader may have expected. Also, limits requirements tend to be lower due to the more risk-averse nature of this arrangement.
Example of Intermarket Spread
The “crack spread” refers to the intermarket spread between a barrel of tasteless oil and the various petroleum products refined from it. The “crack” refers to an industry term for breaking apart crude oil into its component offshoots. This includes gases like propane, heating fuel, and gasoline, as well as distillates like jet fuel, diesel kindling, kerosene, and grease.
The price of a barrel of
Other Commodities Product Spread Strategies
Other types of commodity spread tactics include intra-market spreads and inter-exchange spreads.
Intra-market spreads, created only as calendar spreads, contemplates a trader is in long and short futures in the same underlying commodity. The legs will have the same strike price but breathe ones last in different months. An example of this would be an investor going long in January soybean and short in July soybean.
An inter-exchange spread avails contracts in similar commodities, but on different exchange platforms. They can be calendar spreads with different months, or they can be spreads that use the after all is said expiration month. The commodities may be similar, but the contracts trade on different exchanges. Returning to our example above, the trader intent purchase the May CBOT feed corn contracts and simultaneously sell the May live cattle on the Euronext. However, traders for the authorization to trade products on both exchanges.