Futures Calendar Spread - Definition
Futures Calendar Spread are futures spreads that are simultaneously long and short futures contracts of different delivery months.
Futures Calendar Spread - Introduction
Futures Calendar Spreads, also known as Futures Time Spreads, Futures Horizontal Spreads, Intermonth Spread or Interexpiration Spread, are a class of futures strategies that utilizes futures contracts of different expiration months in order to produce a bullish or bearish futures position which is less volatile than an outright long or short futures position. Because Futures Calendar Spreads are less volatile, they also require far lesser margin than outright positions, resulting in greater leverage and more efficient use of capital.
What Are Futures Calendar Spread?
Futures Calendar Spreads are any futures strategies consisting of futures contracts of different expiration months on the same underlying together into a single position. Futures Calendar Spreads are designed to profit from the difference in rate of movement between near term futures contracts and longer term futures contracts and are therefore much less volatile positions than outright futures positions.
Futures calendar spreads that are long near term futures contracts and short longer term (deferred) futures contracts are known as "Bull Spreads" while futures calendar spreads that are short near term futures contracts and long longer term futures contracts are known as "Bear Spreads".
Learn more about Futures Bull Spread.
Learn more about Futures Bear Spread.
How Futures Calendar Spreads Profit?
Rather than being direct speculations in the price of the underlying asset, futures calendar spreads actually speculate on the price relationship between the near term and longer term futures contracts. Rather than profiting only when the price of the underlying asset moves in a single direction, futures calendar spreads can profit from up to five different scenarios through the various relative price movements between the near term and longer term futures contracts.
For instance, rather than going long on a futures contracts and profiting only when the price of the underlying asset goes up, a futures bull calendar spread profits also when the near term futures contract remain stagnant while the long term futures contract depreciates with the price of the underlying asset remaining stagnant, when the near term futures contract drops by a lesser amount than the long term futures contract when the price of the underlying asset drops slightly. In fact, both kinds of futures calendar spreads are capable of profiting when the price of the underlying asset goes up, down or even sideways, depending on the price relationship between the near term and long term futures contracts. Such price relationship between the near term and long term futures contracts are largely affected by the supply and demand of the underlying asset itself rather than technical speculation which makes futures calendar spreads ideal for trading supply seasonalities of certain commodities such as soybean. One of the most popular futures calendar spreads on soybean is the July/November spread.
Taking advantage of known seasonalities in supply and demand and using the correct futures calendar spread can lead to good consistent profits. Looking back in the decades, you might see the same supply and demand pattern repeating for certain commodities such as the demand for heating oil rising into the winter months. Along with such a pattern, you might also find that the price relationship between near term and deferred futures contracts of those commodities behaving in a fixed manner. According to how they tend to behave, putting on the correct futures calendar spread to take advantage of the opportunity can lead to a low volatility, low risk, low margin and high return trade.
Advantages of Futures Calendar Spreads
Futures Calendar Spreads have the follow advantages over outright futures positions:
Futures calendar spreads requires much lower margin than outright positions due to the fact that the movement in one future contract is hedged by a countermovement in another futures contract, resulting in much lower overall price volatility. Lower margin leads not only to higher return on capital but also allows the participation of futures traders with small accounts.
Due to the countermovement in the futures contracts involved, volatility of the overall position is much lower and are less likely to change by huge amounts even when the price of the futures contracts should suddenly surge in one direction. This leads to a safer trade and more reaction time should fundamentals in the market change suddenly.
More Skill Than Speculation
As futures calendar spreads can profit from more than just movements in the price of the underlying asset, trading futures calendar spreads can be more rewarding for skilfull futures traders as they are not mere chance taking speculations in the single directional move in the price of the underlying asset.
How Can Futures Calendar Spreads Be Traded
Futures calendar spreads can be traded long term by holding until expiration of the near term or long term futures contracts or even daytraded on more volatile assets. The price relationship of near term and long term futures contracts can change several times in a day making it extremely rewarding for skilfull technical traders.
Futures involve risk and are not suitable for all investors.
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