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A calendar spread (also called an intra-commodity spread) is a Futures Trading strategy where a trader buys one Futures contract and sells another contract of the same asset with a different expiration date.
This strategy is used to profit from price differences between contract months while reducing overall market risk. How a Calendar Spread Works Buy (long) a near-term futures contract Sell (short) a longer-term futures contract Profit is made from the price difference (spread) between the two contracts widening or narrowing. Less risk than outright futures trading because exposure to overall price movements is reduced. Focuses on supply & demand dynamics rather than broad market direction. Types of Calendar Spreads (Based on Strategy/Outlook):
Why Trade Calendar Spreads? 1. Lower Risk Compared to Outright Futures Since both contracts are in the same asset, overall exposure is reduced. 2. Takes Advantage of Supply & Demand Shifts Seasonality (e.g., natural gas demand rising in winter). Storage Costs (e.g., crude oil's contango/backwardation). 3. Lower Margin Requirements Exchanges often reduce margin requirements for calendar spreads, making them capital-efficient. Real-Life Example: Crude Oil Calendar Spread Current Prices: March Crude Oil Futures = $75.00 June Crude Oil Futures = $77.00 Spread = $77.00 - $75.00 = $2.00 Bullish Calendar Spread Example: Buy March crude oil at $75.00 Sell June crude oil at $77.00 If the spread widens to $3.00, the trader profits $1.00 per barrel. Bearish Calendar Spread Example: Sell March crude oil at $75.00 Buy June crude oil at $77.00 If the spread narrows to $1.00, the trader profits $1.00 per barrel. Key Takeaways Calendar spreads involve buying one futures contract and selling another with a different expiration date. They focus on price differences rather than overall market direction. Used in commodities, interest rates, and stock index futures. Lower risk & margin requirements than outright futures trades. |
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