Intra-commodity spread
Also written Calendar spread in futures
A 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.
In plain language
An outright futures trader bets on the price. A spread trader bets on the gap between two prices.
In an intra-commodity spread — also called a calendar spread — both legs are the same commodity: typically long one month and short another. Whether gold as a whole rises or falls matters much less than whether the June-August gap narrows or widens.
Because the two legs largely offset each other, settlement default risk is low, and so are the margins. The profit is typically thin in relation to an outright position.
How it works
The workbook's four names for two trades (Chapter 5, section 5.5):
| Trade | Legs | When used | Expectation |
|---|---|---|---|
| Buying a spread / bull spread | Buy near month, sell far month | Near month underpriced or far month overpriced; actual spread above the fundamental spread | Spread narrows |
| Selling a spread / bear spread | Sell near month, buy far month | Near month overpriced or far month underpriced; actual spread below the fundamental spread | Spread widens |
Only market-driven misalignment. A spread trade is reliably profitable only if the misalignment is due to market forces — not harvesting or sowing season, crop failure, or quality issues with the crop expected at warehouses.
Spread margin benefit (SEBI circular, March 2023):
| Spread | Benefit |
|---|---|
| Same underlying commodity | Up to 75% of total initial margin |
| Two different commodities (a complex) | Up to 50%, only if correlation is at least 0.90 |
ELM is charged on both legs individually. Each contract in the spread must be among the first six expiring contracts.
Index construction. Spread trades are paired trades, not single-sided bona fide trades, so they are ignored when computing commodity index values (Chapter 2).
A worked example
Buying a spread. In April, Mr X thinks gold June is cheap relative to gold August. One contract = 1 kg = 100 x 10 g.
| June (buy) | August (sell) | Spread | |
|---|---|---|---|
| April | 50,700 | 50,800 | 100 |
| May | 50,900 | 50,950 | 50 |
| Per 10 g | +200 | -150 |
Net = (200 - 150) x 100 = Rs 5,000
The spread narrowed by 50, and Mr X made 50 per 10 g.
Selling a spread. Mr Y thinks June is expensive relative to August.
| June (sell) | August (buy) | Spread | |
|---|---|---|---|
| April | 50,750 | 50,800 | 50 |
| May | 50,800 | 50,900 | 100 |
| Per 10 g | -50 | +100 |
Net = (100 - 50) x 100 = Rs 5,000
The spread widened by 50. Both traders made money in a market where gold rose — neither had to call the direction.
The margin. If each leg alone required initial margin of Rs 2,25,000 (illustrative), the two legs would need Rs 4,50,000 outright. With a same-commodity spread benefit of up to 75 per cent, initial margin could fall to about Rs 1,12,500 — with ELM still charged on each leg.
Why NISM asks about it
Chapter 5, section 5.5 (Spread Trading), defines intra-commodity spreads, buying and selling a spread, bull and bear spreads, and gives the gold examples and the SEBI spread margin benefit. Chapter 2, section 2.3, excludes spread trades from index computation. Expect questions on which legs make a bull or bear spread, whether the spread is expected to narrow or widen, and the 75 / 50 per cent margin benefits.
Common exam traps
- Buying a spread = buy near, sell far, expecting narrowing. Selling a spread = sell near, buy far, expecting widening.
- Bull spread (futures) expects the spread to narrow; bear spread expects it to widen. Do not carry over the option-strategy meanings of bull and bear spreads.
- 75 per cent benefit for the same commodity, 50 per cent for different commodities — and the latter needs a correlation of at least 0.90.
- ELM is not reduced; it applies to each leg.
- First six expiring contracts only for the spread margin benefit.
- Seasonal distortions defeat the trade. The workbook warns that harvest, sowing, crop failure and quality issues can move a spread for reasons that will not correct.
- The workbook's bear spread example is dated 1 June to 15 July, though the text says the spread widened on the 15th day. The arithmetic (+140, -80, net +60) is unaffected.
Check yourself
1.What does "buying a spread" mean, and when is it adopted?
- a)Selling the near-month contract and buying the far-month contract, when the near month is overpriced
- b)Buying the near-month contract and simultaneously selling the far-month contract, when the near month is underpriced or the far month is overpriced
- c)Buying futures in two different but related commodities in the same calendar month
- d)Buying a call and a put with the same strike and expiry
Show the answer
Answer: (b) Buying the near-month contract and simultaneously selling the far-month contract, when the near month is underpriced or the far month is overpriced
"Buying a spread is an INTRA-COMMODITY spread strategy. It means BUYING A NEAR-MONTH CONTRACT AND SIMULTANEOUSLY SELLING A FAR-MONTH CONTRACT. This strategy is adopted WHEN THE NEAR-MONTH CONTRACT IS UNDERPRICED, OR THE FAR-MONTH CONTRACT IS OVERPRICED." The trader squares off "when the spread corrects and the contracts are traded at the fair spread."
Why the other options are wrong:
- (a) is selling a spread: "selling a near-month contract and simultaneously buying a far-month contract... adopted when the near-month contract is overpriced or the far-month contract is underpriced."
- (c) Buying both legs is not a spread at all. A spread across related commodities is an inter-commodity spread, and it still has one long and one short leg.
- (d) is a long straddle, an options strategy.
Where this is taught
Free preparation for NISM Series XVIRelated terms
- Extreme Loss MarginA flat 3.5 per cent margin collected on cash-market positions to cover losses falling outside what the VaR margin is designed to capture.
- 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.
- ContangoA market in which the futures price sits above the spot price, normally because the futures buyer is paying for the cost of carrying the commodity through to delivery.
- Initial marginThe deposit both the buyer and the seller of a futures contract must place before the position is accepted, sized to cover a 99% worst-case one-day loss on that position.
- Inter-commodity spreadA long futures position in one commodity and a short position in a different but economically related commodity for the same month — such as guar seed against guar gum — to trade the gap between them.
- 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.
- Crack spreadAn inter-commodity spread strategy in the energy complex — trading crude oil futures against futures on the petroleum products refined from it — used to lock in a refiner's margin.
- 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.
- 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.
- Futures bear spreadAn 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.