What it means
A futures contract (an agreement to buy or sell an asset at a set price on a future date) exists for many delivery months at once. An intramarket spread takes opposite positions in two of those months, for example buying December corn and selling September corn.
Because both legs follow the same underlying product, they tend to rise and fall together. What the trader cares about is the spread, which is the price of one contract minus the price of the other.
If the gap widens or narrows in the direction the trader expected, the position makes money even when the whole market drifts sideways or falls. This matters in business because the gap between delivery months reflects storage costs, interest costs and expectations about future supply.
A producer or processor can read it as a signal about whether it pays to store product or sell it now. Traders use it as a lower-risk way to express a view on those forces.
Exchanges usually ask for lower margin (the good-faith deposit required to hold a position) on spreads than on outright positions, because the two legs partly offset each other. That makes the strategy cheaper to run, though it is not free of risk.
Each leg can still move by a different amount, and a spread can lose money quickly if the gap moves the wrong way. The term is most often contrasted with an intermarket spread, which pairs two related but different products, such as crude oil against heating oil.
Intramarket is the narrower idea of one market and two dates. In everyday trading talk it is used almost interchangeably with calendar spread.
In practice
Real-world examples.
Example
A grain merchant sees plentiful old-crop corn sitting in silos and expects the gap between the nearby and distant contracts to widen. She sells the nearby contract and buys the deferred one, so she gains if the market starts rewarding storage more. If the whole corn market falls, the loss on one leg is largely cancelled by the gain on the other.
Example
A natural gas trader buys a winter contract and sells a summer contract at the same pipeline hub, because heating demand usually lifts winter prices. If the winter premium grows from $0.80 to $1.10 per million British thermal units, the position profits whatever happens to the overall level of gas prices.
Example
A coffee roaster rolls its hedge forward by selling an expiring contract and buying a later one in a single order. The roll is an intramarket spread, and its cost is the gap between the two months. The finance team books that gap as part of the cost of hedging rather than as a trading result.
Formula
Calculation
Spread = price of the later contract - price of the earlier contract
Profit or loss on a long spread = (spread at exit - spread at entry) x contract size x number of contracts
A trader buys one December corn contract at $4.80 per bushel and sells one September corn contract at $4.50 per bushel. Each contract covers 5,000 bushels. The opening spread is 4.80 - 4.50 = $0.30. Later December trades at $4.95 and September at $4.55, so the spread is 4.95 - 4.55 = $0.40. The December leg gains (4.95 - 4.80) x 5,000 = $750 and the September leg loses (4.55 - 4.50) x 5,000 = $250, so the net profit is 750 - 250 = $500. This matches the widening of the spread: (0.40 - 0.30) x 5,000 = $500.Case study
Seen in the real world.
Harrowgate Grain Partners is an illustrative, fictional merchant that stores wheat for six months each year. Its finance manager noticed that the later delivery month traded $0.35 per bushel above the nearby month, while the firm's storage and interest costs came to only $0.25 per bushel.
Harrowgate bought the physical grain and sold the deferred contract against it, locking in a margin of $0.10 per bushel above its costs on 400,000 bushels, which is $40,000. The illustrative lesson is that the spread told the firm whether storage would pay before it committed any warehouse space.
Watch out
Common mistakes.
- Assuming a spread is risk-free because both legs sit in the same market, when the two contracts can move by different amounts and the gap can move against you.
- Judging the result by the price of one leg alone, when the profit or loss depends only on the change in the gap between the two.
- Confusing an intramarket spread with an intermarket spread, which pairs two different but related products rather than two dates in the same product.
Questions
People also ask.
Is an intramarket spread the same as a calendar spread?
In most cases yes, because both describe buying and selling the same contract in different delivery months.
Does the trader need a view on market direction?
No, the view is about how the gap between the two months will change, which is why the position can profit in a rising, falling or flat market.
Why is margin usually lower on a spread?
The two legs partly offset each other, so the exchange sees less overall risk than in a single outright position.
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