What is a '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.

BREAKING DOWN 'Futures Spread'

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

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.

RELATED TERMS
  1. Long Leg

    The part of an option spread strategy that involves buying an ...
  2. Spread Option

    A spread option is a derivative based on the value of the difference, ...
  3. Leg

    A leg is one component of a derivatives trading strategy, in ...
  4. Credit Spread Option

    A credit spread option is a financial derivative contract that ...
  5. Frontspread

    A type of options spread in which a trader holds more short positions ...
  6. Spread Betting

    Spread betting is a type of speculation that involves taking ...
Related Articles
  1. Trading

    Trading Calendar Spreads in Grain Markets

    Futures investors flock to spreads because they hold true to fundamental market factors.
  2. Trading

    S&P 500 Options On Futures: Profiting From Time-Value Decay

    Writing bull put credit spreads are not only limited in risk, but can profit from a wider range of market directions.
  3. Trading

    Vertical Bull and Bear Credit Spreads

    This trading strategy is an excellent limited-risk strategy that can be widely used.
  4. Investing

    How To Calculate The Bid-Ask Spread

    It's very important for every investor to learn how to calculate the bid-ask spread and factor this figure when making investment decisions.
  5. Trading

    How To Manage Bull Put Option Spreads

    Learn how to halt options losses when the market moves quickly in an unfavorable direction.
  6. Investing

    Getting Market Leverage: CFD versus Spread Betting

    Compare and contrast: CFD versus Spread Betting investment products, which offer significant market exposure with a small initial deposit.
RELATED FAQS
  1. In what types of financial situations would credit spread risk be applied instead ...

    Find out when credit risk is realized as spread risk and when it is realized as default risk, and learn why market participants ... Read Answer >>
  2. How are futures used to hedge a position?

    Futures contracts are one of the most common derivatives used to hedge risk. Learn how futures contracts can be used to limit ... Read Answer >>
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center