Crack Spread

DEFINITION of 'Crack Spread'

The spread created in commodity markets by purchasing oil futures and offsetting the position by selling gasoline and heating oil futures. This investment alignment allows the investor to hedge against risk due to the offsetting nature of the securities.

BREAKING DOWN 'Crack Spread'

The name of this strategy is derived from the fact that "cracking" oil produces gasoline and heating oil. Therefore, oil refiners are able to generate residual income by entering into these transactions. During the summer of 2005, the effects of hurricanes in the Southeastern United States created large volatility in the crack spread.

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