Futures Spread

A futures spread is an arbitrage technique in which a trader takes two positions on a commodity to capitalize on a discrepancy in price. In a futures spread the trader completes a unit trade, with both a position to buy and a position to sell.

A futures spread is one type of strategy a trader can use to seek out profit through the use of derivatives on an underlying investment. In a futures spread, the goal is to profit from the change in the price difference between two positions. A trader may seek to take a futures spread on an investment when he feels there is a potential to gain from price volatility.

A futures spread requires taking two positions simultaneously with different expiration dates in order to benefit from the price change. The two positions are traded simultaneously as a unit with each position considered to be a leg of the unit trade.

Calendar spreads are the most common type of futures spread. In a calendar spread a trader takes two positions depending on their price speculation. Futures markets are fueled by investors taking opposite speculative views. If a trader believes a price will go up over time, they can take a short term buy position and a long term sell position. If they expect the price to go down, they can seek to write a contract to sell at a higher price. The benefit of a futures spread is that the trader has taken two positions. This allows them to earn a guaranteed profit from the exercise of both positions.

Taking only a single leg option leaves the trader open to higher risk. A trader can potentially benefit from a single leg option if they hold the underlying commodity and take an option to sell at a higher price in the future. If a trader takes an option to buy in the future through a single leg trade then there is no guaranteed profit from two positions and they are open to the risk of a price decline.

Bitcoin futures began trading in December 2017. These futures products offer an opportunity for a futures spread to benefit from price volatility. A trader who believes a price will go up over time can take a buy contract one month out and a sell contract two months out at a higher price. They exercise their option to buy in the one month contract and then sell in the two month contract benefiting from the differential.