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.

RELATED TERMS
  1. Cracking

    Used in the oil and gas industry to refer to a variety of methods ...
  2. Crack

    A trading strategy used in energy futures to establish a refining ...
  3. Oil Refinery

    An industrial plant that refines crude oil into petroleum products ...
  4. Intercommodity Spread

    Going long on one futures market in a given delivery month and ...
  5. Selling Hedge

    A hedging strategy with which the sale of futures contracts are ...
  6. Oil ETF

    A category of exchange-traded funds that invest in companies ...
Related Articles
  1. Options & Futures

    Commodities: Heating Oil

    By Noble DrakolnHeating oil is a refined byproduct of crude oil. After crude oil is broken down during the refinement process, it is separated into heating oil. Similar to diesel oil, heating ...
  2. Options & Futures

    How To Lock In Low Oil & Gas Prices

    We provide a quick overview of how companies can manage the risk of adverse moves in commodity prices by hedging in the futures market.
  3. Investing Basics

    Investing in Crude Oil Futures: The Risks and Rewards

    Learn about the risks and rewards of trading oil futures contracts. Read about a few strategies to limit the risk in trading oil futures contracts.
  4. Active Trading

    How Does Crude Oil Affect Gas Prices?

    Find out how this commodity's fluctuating price affects more than just how much you pay at the pump.
  5. Trading Strategies

    Oil Boom 2.0: Be Sure You Are Ready to Invest

    Learn about the potential for oil boom 2.0, and discover why some experts say this is a good time to invest in oil companies and ETFs.
  6. Economics

    Who Wins With Low Energy Prices? 

    Low oil prices are here to stay for some time. Which economies will benefit or lose from the low oil price regime?
  7. Fundamental Analysis

    Long on Oil? Buy Canadian Dollars

    Discover why investing in the Canadian dollar can give investors exposure to the crude oil market without the risks of futures investing.
  8. Active Trading

    What Determines Oil Prices?

    Changes in the price of oil aren't arbitrary. Read on to find out what moves them and why.
  9. Mutual Funds & ETFs

    Take Advantage of Cheap Oil, Invest in these ETFs

    With crude oil prices at record lows, investors should consider oil ETFs over oil company stocks as ETFs more closely mirror the price of oil
  10. Economics

    How Oil Prices Impact the U.S. Economy

    Now that the United States has increased oil production through shale oil and fracking, low oil prices can harm the U.S. oil industry and its workers.
RELATED FAQS
  1. If oil producers run out of room to store oil, will the price of gasoline plummet?

    Learn about what happens to gasoline price when room to store oil runs out and whether this creates a good situation for ... Read Answer >>
  2. How can I buy oil as an investment?

    Investors have many options for getting involved with oil. These methods come with varying degrees of risk and range from ... Read Answer >>
  3. What causes oil prices to fluctuate?

    Discover how OPEC, demand and supply, natural disasters, production costs and political instability are some of the major ... Read Answer >>
  4. Why do companies enter into futures contracts?

    Learn how companies use futures contracts for the purposes of hedging their exposure to price fluctuations as well as for ... Read Answer >>
  5. Why are stocks and oil so correlated right now?

    Learn whether the stock market and oil prices will continue their highly correlated price relationship or decouple again ... Read Answer >>
  6. Besides oil companies, what businesses are hurt by cheap oil prices?

    Falling oil prices do not only affect oil companies. Learn what other types of businesses are unintended victims of the drop ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center