Spreads: intramarket, intermarket, intercommodity, bull vs. bear
An outright trader bets on price direction. A spread trader bets on a relationship: one price compared with another. CME puts it this way: spread traders care more about the relationship between the legs than about the actual prices or the direction of the market.
What a spread is
The CFTC glossary describes a spread as the purchase of one futures position against the sale of another, to profit from a change in their price relationship. It names three shapes:
- one delivery month against another month of the same commodity,
- one commodity against a different commodity in the same delivery month, and
- a commodity in one market against the same commodity in another market.
“Spread” also means the price difference itself, for example the difference between two months of the same commodity.
The types and their many names
The vocabulary is messy because the same spread has several names. Here is how the CFTC glossary and CME’s grain course use them:
| Type | What you do | Other names | Example |
|---|---|---|---|
| Intramarket | Buy one month, sell a different month, same commodity | Calendar, interdelivery, intracommodity | July corn against December corn |
| Intercommodity | Buy one commodity, sell a different but related one, usually the same month | Intermarket (CFTC and CME both use it as another name) | Soybeans against corn |
| Commodity product | Raw commodity against the products made from it | Crush, crack | Soybeans against meal and oil |
Two product spreads worth knowing by name, both defined by the CFTC:
- Crush spread: buy soybean futures, sell soybean meal and soybean oil futures, to set a processing margin.
- Crack spread: buy crude oil futures, sell refined product futures, to set a refining margin.
CME adds that hedgers use calendar spreads to roll a hedge from one delivery month to the next.
Why calendar spreads move: storage and supply
CME’s grain course explains the economics. Each month’s futures price reflects the expected price in that month, so the gap between, say, December and March is what the market is offering to store grain from December to March.
- When supplies are plentiful (around harvest), deferred months trade further above nearby, and the spread widens, which encourages storage.
- When supplies get tight, users bid up the nearby month, the spread narrows, and grain comes out of storage.
- In extreme shortages the market inverts: nearby above deferred.
Bull and bear spreads
The CFTC defines a futures bull spread as a spread meant to profit from rising prices while limiting the loss if that view is wrong. In agricultural commodities you buy the nearby and sell the deferred. A bear spread is the reverse: sell the nearby and buy the deferred, to profit from falling prices.
The logic links back to storage. CME’s course describes tightening supply as users bidding up the nearby month, which narrows the spread. A trader long the nearby and short the deferred gains from exactly that move. The NFA Series 3 study outline lists both “normal or inverted market strategies” and “bull and bear spreads” under spreading.
Worked example: a bull spread that narrows
Made-up numbers for teaching, not market data. Prices per bushel. Measure the spread as nearby minus deferred.
Start, a normal (carrying charge) market:
- July corn $4.00, December corn $4.20. Spread = 4.00 minus 4.20 = minus $0.20 (July 20 cents under December).
- Bull spread: buy July at $4.00, sell December at $4.20.
Later, supplies tighten:
- July $4.30, December $4.35. Spread = minus $0.05.
Leg by leg:
- July: bought $4.00, now $4.30: +$0.30
- December: sold $4.20, now $4.35: minus $0.15
- Net: +$0.15 per bushel
Shortcut: the spread went from minus 0.20 to minus 0.05, a change of +0.15. For a long nearby spread, the profit equals the change in (nearby minus deferred). In a normal market the bull spreader wants the nearby discount to narrow; the bear spreader, holding the opposite legs, would have lost the same 15 cents and wants it to widen.
Notice that both prices rose, yet one leg still lost money. As CME says, in most cases one leg of a calendar spread loses and the other gains; the spread is successful when the gain outweighs the loss.
Margin and risk
CME notes that spreads typically carry less risk than outright positions and so tend to have lower margin requirements. (Its course gives an illustrative soybean and corn margin credit from 2016 and stresses that margins always change.)
But lower margin is not the same as low risk. The risk disclosure every futures customer receives under 17 CFR 1.55 says all futures positions involve risk and that a spread position “may not be less risky” than an outright long or short position.
Key ideas
- A spread is long one futures contract and short a related one; it trades the relationship, not the direction.
- Intramarket = same commodity, different months (calendar, interdelivery, intracommodity).
- Intercommodity = different but related commodities; the CFTC and CME also call it intermarket.
- Crush (soybeans vs. meal and oil) and crack (crude vs. products) are processing spreads.
- Bull spread (agricultural): buy nearby, sell deferred. Bear spread: sell nearby, buy deferred.
- Spread profit = change in (nearby minus deferred) for a long nearby spread. In a normal market, bulls want the nearby discount to narrow, bears want it to widen.
- Spread margins are often lower, but a spread may not be less risky than an outright position.