The Ins And Outs Of Futures Calendar Spread Trading | StoneX

No matter whether you’re an active speculator or a hedger, spreads can be a valuable addition to your comprehensive trading plan. Featuring limited risk exposure and vastly reduced margin requirements, spreads offer a variety of advantages to anyone actively pursuing market share.

One way to benefit from these unique instruments is through futures calendar spread trading. Given adequate resources and manageable expectations, calendar spreads are a viable way of engaging the futures markets.

What Is a Calendar Spread?

Calendar spreads—also called intramarket spreads—are types of trades in which a trader simultaneously buys and sells the same futures contract in different expiration months. Calendar spreads may be executed in a bullish or bearish fashion, depending on the position taken in the near month contract.

Any trades are educational examples only. They do not include commissions and fees.

This example illustrates how Carey the energy trader could execute a bullish calendar futures spread in West Texas Intermediate (WTI) crude oil:

• Carey buys one lot of January 2020 WTI crude oil
• At the same time, Carey sells one lot of June 2020 WTI crude oil

By opening concurrent long and short positions in the same market with different contract months, Carey has executed a calendar spread trade. The process may be routinely completed with minimal effort in either a self-directed or broker-assisted capacity. At its simplest, futures calendar spread trading isn’t much more involved than buying or selling a futures contract outright.

Futures Calendar Spread Trading: Form and Function

At this point, you may be wondering why on earth Carey would buy January WTI crude oil and sell June WTI crude oil. The position is effectively null, given the open long and short positions, right? Isn’t the trade essentially net-flat, with no upside?

Well, not exactly. Carey is in a position to secure a profit with limited risk and minimal capital outlay. Let’s take a look at the benefits of Carey’s bull spread play:

• Minimal risk: One of the most attractive aspects of futures calendar spread trading is the minimal risk exposure. Because both active long and short positions are at work in the market, extreme bullish or bearish moves in asset pricing aren’t necessarily detrimental. As long as the separate contract months move in tandem, a trader can avoid capital loss.

• Reduced margins: Compared to trading outright futures, spread margin requirements are vastly reduced. For instance, WTI crude oil commonly requires $1,000 in margin to be traded on an intraday basis and $4,000 to be held through the daily electronic close. In contrast, trading WTI spreads may be accomplished with as little as $100 in margin money, depending on the duration and structure of the spread itself.
• Opportunity: Depending on the product, intramarket volatility can produce significant returns. For Carey, a profit may be realized in several ways. First, if the January contract rallies more than the June contract, the gains from the long position will outweigh losses from the short. Conversely, if the June issue falls more than the January contract, then gains from the short position will exceed losses from the open long. In the event that contract prices diverge, gains will be realized on both legs of the spread; if they converge, a loss will be taken.

For a wide variety of market participants, futures calendar spread trading is an ideal strategy. The limited risk and reduced margin requirements make trading spreads affordable. Plus, they have extensive applications for producer hedging, specifically in the ag commodities environment.

Getting Started With Spreads

Alongside intermarket and commodity product offerings, calendar spreads stand as one of the three primary types of futures spreads. Each has a unique form and function, along with a specific set of advantages.