Intramarket Spreads


An intramarket s read, also called a time spread, comprises a long position in one contract month against a short position in another contract month of the same commodity on the same exchange. In an intramarket spread, the price is quoted as:


Spread Price = Price of Nearby Future-Price of Deferred Future


As an example of such a spread, assume that on January 5 a gasoline refiner buys the March-April unleaded gasoline spread at $.0416 under. That means the floor broker is instructed simultaneously to buy March unleaded gasoline and sell April unleaded gasoline at a differential of $.0416 of March under April. Assume that by February 15 when the spread is liquidated, it has narrowed to $.0268 under, resulting in a profit on the spread of $.0148. Commission costs and exchange fees will affect final profits or losses. Gains and losses on the spread are outlined in the figure below.


Unleaded Gasoline Time Spread



It is conventional to call the person who buys the near-term contract and sells the far-term contract the spread buyer. The combination of a long nearby contract and a short deferred contract is sometimes referred to as a bull spread. The holder of a bull spread looks for prices generally to rise, with the price of the near-term contract rising faster than the price of the far-term contract. Conversely, the seller of the spread (short the nearby, long the deferred) is said to have executed a bear spread in expectation that prices generally will decline, with the nearby declining more than the deferred.


In this example, the price of the near-term future rose more than the price of the far-term future as the general price level of unleaded gasoline rose. This spread could profit in a declining market if the short side of the spread were to fall more than the long side.


Intermarket Spreads


An intermarket spread consists of long position on one exchange and short position on another exchange in the same or a closely related commodity. An example is a long position in September wheat on the Chicago Board of Trade and a short position in September wheat on the Kansas City Board of Trade. Such spreads are among the more difficult to execute since they require transactions on different exchanges.


Intercommodity Spreads


An intercommodity spread is made up of position in one commodity and a short position in a different but economically related commodity. An example of an intercommodity spread is the so-called “TED” spread traded on the Chicago Mercantile Exchange. The TED spread is equal to the difference between the prices of a three-month U.S. Treasury bill futures contract and a three-month Eurodollar time-deposit futures contract. These markets are closely related (see the figure below) but, nonetheless, the difference between them varies over time. Traders often take positions in the TED spread based on an opinion as to what will happen to rates for private vs. government short-term debt.

The TED Spread


Another intercommodity spread in the financial futures markets is the so-called NOB spread, or U.S Treasury notes over U.S. Treasury bonds. This is spread across the “yield curve,” or the difference in interest rates on U.S. Treasury securities of different maturities.


Commodity-Products Spreads


A commodity-products spread comprises a long position in a commodity against short positions of an equivalent amount of the products derived from it, or vice-versa. A well-known example of a commodity-products spread is the so-called soybean crush, which involves going long raw, unprocessed soybeans again short positions in soybean products - soybean meal and soybean oil.


The soybean crush gets its name from the fact that when soybeans are "crushed" in processing two products are made, meal and oil. A “reverse” crush is a spread in which soybean futures are sold and soybean oil and meal futures are bought. Traders undertake the crush (or reverse crush) when the price relationship between processed and unprocessed soybeans is different from what they expect.


Another well known commodity-products spread is the petroleum “crack” that involves purchasing crude oil futures and selling heating oil and/or unleaded gasoline futures, or vice versa.