What it means
An outright long position benefits from a rising contract price, while an outright short position benefits from a falling one. A spread holds both directions in related contracts to express a view about their relative movement.
A calendar spread uses different expirations of the same underlying; a trader might buy a nearer month and sell a later month if expecting the near-month price to strengthen relative to the later price. An inter-commodity spread compares different but related products, and its quantities may need adjustment for contract sizes and economic relationships, rather than simply buying one contract and selling one other contract.
Write the spread convention down before trading. 'Near minus far' and 'far minus near' give opposite signed quotations, so a statement that the spread widened is ambiguous without identifying the convention and positions.
The net result is the long leg's profit or loss plus the short leg's profit or loss, so one leg can lose more than the other gains, even when both underlying prices move in the same direction. Related contracts often move together, which can reduce some outright price exposure.
Correlation can weaken under supply shocks, storage constraints, changing demand or expiry-specific events, making an apparently quiet relationship unstable. A spread order may execute both legs together under the market's rules, while entering them separately can leave a temporary outright position if one leg fills and the other does not.
Margin can sometimes recognise offsets between qualifying legs, but reduced margin is not reduced maximum loss. The applicable exchange and clearing rules determine the cash requirement and can change during stress.
Delivery remains a leg-level obligation, so holding a calendar spread through the nearer expiry can create physical delivery or settlement consequences even though a later offsetting position remains open. A business hedge and a speculative spread have different objectives.
A hedge should correspond to a real exposure such as the price relationship between an input and output, whereas a trading spread without that exposure is a bet on relative prices. For managers, evaluate both the economics and operational controls.
Set position limits, document hedge quantities, reserve cash for adverse movements and reconcile both legs instead of monitoring only the displayed net spread.
In practice
Real-world examples.
Example
A trader buys a June contract at $70 and sells a September contract at $72. If both rise by $3, the equal-sized legs offset before costs. If June rises by $5 and September by $2, the relationship change benefits this position.
Example
A processor studies the relationship between its input commodity and finished product. An inter-commodity spread can approximate that relationship, but differences in yield, grade and contract size leave residual business exposure.
Example
A trader's long leg fills while the intended short leg remains unfilled. Until the second trade is completed or the first is reversed, the trader holds outright exposure rather than the planned balanced spread.
Formula
Calculation
Using the near-minus-far convention, a spread starts at $70 minus $72 = -$2. Later it is $74 minus $73 = $1.
A long-near, short-far position gains $3 per underlying unit: $4 from the long leg minus $1 lost on the short leg. With 1,000 matched units, that is $3,000 before fees and funding effects.Case study
Seen in the real world.
Fictional case study: Stonefield Foods used a calendar spread to manage the price relationship between two procurement periods. The treasury team expected the near-month market to tighten, but initially assessed risk only from the small historical spread range. A delivery disruption changed the nearer contract sharply while the later contract moved little.
The spread generated an adverse cash requirement, even though managers had assumed the offsetting short leg would protect the account from large movements. Stonefield reviewed expiry-specific scenarios and reduced its exposure. It introduced a two-leg reconciliation and a cash stress test, learning that spread risk comes from the relationship breaking or moving unexpectedly rather than from the outright price alone.
Watch out
Common mistakes.
- Calling a spread risk-free because one leg offsets another. Relative prices can move sharply, and one leg's loss may exceed the other's gain.
- Using opposite price conventions without noticing. Record which contract is subtracted from which and how that maps to the long and short positions.
- Ignoring leg execution, expiry or contract-size differences. A displayed net price does not remove operational exposure in the component contracts.
Questions
People also ask.
Does a spread always use different months?
No. Calendar spreads do, while inter-commodity spreads use related products. Other structures depend on the contracts and strategy being compared.
Can both legs lose money?
Yes. The long contract can fall while the short contract rises. Offset is a possibility, not a promise that one leg always pays for the other.
Is lower margin proof that the spread is safe?
No. Margin is a risk-control requirement, not a loss ceiling. Compare adverse relationship changes and available cash independently of the initial deposit.
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