Futures bear spread
Also written Bear spread using futures · Bear spread (futures) · Futures bear calendar spread
An intra-commodity futures spread taken when the actual gap between two calendar months is narrower than the fundamental average difference — sell the near month, buy the far month, and wait for the gap to widen.
In plain language
The gap between two delivery months of the same commodity is the spread. The workbook says that gap has a normal size, which it calls the fundamental spread, or the average difference between the two calendar months.
Sometimes the actual gap is narrower than normal. A trader who expects it to open back out can trade the gap.
That trade is a futures bear spread. Sell the near month. Buy the far month. Then wait for the gap to widen.
It is the exact mirror of the futures bull spread. Same two contracts, both legs reversed.
Again, no view is being taken on the commodity itself. Prices can fall on both legs and the trade still wins, so long as the near month falls by more than the far month.
The workbook's other name for this trade is selling a spread. It is not the option bear spread of the vertical spread page.
How it works
The trigger. A bear spread using futures is created when the actual spread is less than the fundamental spread — the average difference — between two calendar month contracts. The expectation on creating it is that the difference will widen.
The legs. Sell the near-month futures contract; buy the far-month futures contract. Like its mirror, it is an intra-commodity (calendar) spread, and the workbook groups both under the same heading.
The steps. Step 1, sell near and buy far. Step 2, hold and watch the spread daily. Step 3, square off both legs once the spread has widened.
Margins. The same spread margin framework applies as for the bull spread: SEBI's March 2023 circular allows a benefit of up to 75% of total initial margin on the same underlying commodity and up to 50% across a commodity complex where the two commodities show a correlation of 0.90, with Extreme Loss Margin charged individually on each leg and both contracts required to be among the first six expiring contracts.
The health warning. The workbook states that a spread strategy is reliably profitable only where the misalignment in prices is caused by market forces, and not by special factors such as harvesting season, sowing season, crop failure or a quality issue with the crop expected to come into the warehouses.
A defect in the source, flagged rather than fixed. The workbook's worked bear-spread table starts on 1 June and its narrative says the spread widens sharply on the 15th day, which points to 15 June. The table's second row is nonetheless labelled 15th July. The arithmetic is unaffected — the prices and the net gain are internally consistent — but the date label and the narrative do not agree, so do not treat either date as an examinable fact.
A worked example
The workbook's own gold bear spread, taken exactly as printed.
| June gold futures | August gold futures | Spread | |
|---|---|---|---|
| 1 June | Rs 50,100 | Rs 50,300 | 200 |
| Squared off | Rs 49,960 | Rs 50,220 | 260 |
| Leg result | +140 (short) | -80 (long) | |
| Net gain | +60 |
He sells June at Rs 50,100 and buys August at Rs 50,300, so the opening spread is Rs 200. When he closes, June has fallen to Rs 49,960 and August to Rs 50,220, and the spread has widened to Rs 260.
The short June leg gains Rs 140 per 10 grams. The long August leg loses Rs 80 per 10 grams. Net Rs 60 per 10 grams, which is the 200-to-260 move in the spread.
In rupees per lot, gold being quoted per 10 grams on a 1 kilogram contract of 100 quotation units:
Rs 60 x 100 = Rs 6,000 net gain on a one-lot spread.
The instructive part is that gold fell on both legs. An outright long in either contract would have lost money. The bear spread made money because the near month fell faster than the far month, which is the only thing it was ever betting on.
Why NISM asks about it
Chapter 5 (Uses of Commodity Derivatives), section 5.5, immediately after the bull spread and set out in the same three-step form with its own worked gold table.
Exam-wise the two are always a pair: a bear spread using futures is created when the actual spread is ____ than the fundamental spread — less — and the expectation is that the difference will ____ — widen. The workbook's table gives a clean calculation answer of a Rs 60 net gain. The trap version of the question gives you the bull spread's trigger and the bear spread's legs, or asks about the option bear spread from section 5.7.2 instead.
Common exam traps
- Actual spread LESS than fundamental, expected to WIDEN. The bull spread is the other way on both counts.
- Sell near, buy far. Reverse of the futures bull spread, and the most common wrong answer.
- This is not the option bear spread. That one sells the lower strike and buys the higher strike of the same expiry — see vertical spread. Strikes have no role here.
- The workbook calls the same trade selling a spread in an earlier section of the same chapter. Two names, one position.
- Falling prices do not decide the outcome. In the workbook's table both contracts fell and the spread trader still gained Rs 60 per 10 grams, because the spread widened.
- The table's 15th July date label conflicts with the narrative's 15th day from 1 June. The prices and the net gain are consistent; the date is not. Learn the arithmetic, not the date.
- Margin benefit is conditional. Extreme Loss Margin applies to each leg individually, and the relief needs both contracts to be among the first six expiring contracts.
- Seasonal causes — harvest, sowing, crop failure, expected warehouse quality problems — do not make a reliable spread trade. Only market-force mispricing does.
Where this is taught
Free preparation for NISM Series XVIRelated terms
- Vertical spreadTwo options of the same type and the same expiry but different strikes, one bought and one sold — a limited-profit, limited-loss position that trades away part of the upside to cut the cost or cap the risk.
- BackwardationA market in which the futures price sits below the spot price — the cost of carry says futures should be dearer, and something is overriding it.
- Calendar spreadA long position in futures of one maturity and a short position in futures of another maturity on the same underlying. It is a bet on the price gap between the two months, not on market direction.
- Buying a spreadAn intra-commodity spread trade — buying the near-month futures contract and simultaneously selling the far-month contract — taken when the near month looks underpriced or the far month overpriced relative to fair value.
- Futures bull spreadAn intra-commodity futures spread taken when the actual gap between two calendar months is wider than the fundamental average difference — buy the near month, sell the far month, and wait for the gap to narrow.
- Intra-commodity spreadA long futures position in one contract month and a short position in another month (or a different lot size) of the same commodity, taken to profit from a change in the gap between them.
- Selling a spreadAn intra-commodity spread strategy that sells the near-month futures contract and buys the far-month contract at the same time, taken when the near month looks overpriced relative to the far month.
- Spread margin benefitThe lower overall margin SEBI permits on a spread position versus margining each leg on its own — up to 75% for the same commodity, up to 50% across two related commodities.