Spread order facility
Also written Spread order
An exchange order type that trades a calendar spread as one order — priced as the difference between far and near months — so both legs execute together at once.
In plain language
A calendar spread has two legs. Placed as two separate orders, they may fill at different moments or not at all, and the trader pays full margin on the first leg until the second fills.
The spread order facility avoids that. Exchanges run a separate spread order book in which the trader buys or sells the spread itself — the price difference between the far-month and near-month contract — as a single order. When it matches, both legs are executed at the same time.
The workbook states the benefit directly: entering a calendar spread as two separate orders carries a risk of adverse price movement between the orders and a higher margin requirement until the second order is executed; both these issues can be fixed by using the spread order facility.
A quirk worth noticing: a spread price can be positive, negative or zero — something no ordinary contract price can be.
How it works
Naming. A spread contract such as USDINR MAR24MAY24 trades the difference between MAY24 (far month, second leg) and MAR24 (near month, first leg). On the trader workstation it is placed as a Buy Spread order (BSP) or Sell Spread order (SSP).
Direction (Chapter 6, section 6.2.5):
| Order | Near month (1st leg) | Far month (2nd leg) |
|---|---|---|
| Buy spread | Sell | Buy |
| Sell spread | Buy | Sell |
Matching. Spread orders match on price-time priority, where price is the far-minus-near difference.
Execution prices.
First leg price = Reference price = Last traded price of the first-leg contract
Second leg price = Reference price + spread price
Order book display. Like the normal order book, it shows the number of orders, quantity in lots and price, buy side from highest to lowest and sell side from lowest to highest.
The formula
Spread price = Far-month price − Near-month price
Near-leg trade = LTP of near-month contract
Far-leg trade = LTP of near-month contract + Spread price
A worked example
The workbook's spread order book for USDINR MAR24APR24, top of book:
| Buy orders | Buy lots | Buy price | Sell price | Sell lots | Sell orders |
|---|---|---|---|---|---|
| 2 | 35 | 0.0600 | 0.1000 | 10 | 1 |
| 3 | 25 | 0.0300 | 0.1100 | 11 | 3 |
| 1 | 78 | 0.0000 | 0.1400 | 42 | 1 |
| 1 | 1 | −0.0100 | 0.1500 | 86 | 4 |
Note the zero and negative spread prices on the buy side.
Illustrative execution; the LTP is hypothetical. Anita, expecting the spread to widen, enters a buy spread of 10 lots at 0.1000 and matches the best offer. The last traded price of MAR24 is 83.2000.
MAR24 leg: SELL 10 lots at 83.2000
APR24 leg: BUY 10 lots at 83.2000 + 0.1000 = 83.3000
Later the spread widens to 0.1500 and she sells the spread. Her gain is the widening:
(0.1500 − 0.1000) × 10 lots × 1,000 = Rs 500
Both legs were entered and exited simultaneously — no moment with only one leg open.
Why NISM asks about it
Chapter 6, section 6.2.5 (Spread Order Book), explains the spread contract, BSP and SSP, direction of legs, price-time matching, the reference-price execution rule and the MAR24MAY24 illustration. Chapter 5, section 5.6, recommends it to avoid execution risk in calendar spread trading. Expect "a buy spread means…" and execution-price questions.
Common exam traps
- Buy spread = sell near, buy far. Not "buy both".
- Spread price = far − near, and it can be negative or zero.
- First leg trades at the near month's last traded price; the second leg at that price plus the spread.
- Matching is on price-time priority, just like the regular book.
- It removes execution risk and the interim higher margin — not basis risk.
Check yourself
1.A trader sells March USDINR futures at 83 and buys April at 83.20. Ten days later March is 83.10 and April is 83.40. What is his gain per contract, and why is the margin lower than normal?
- a)Rs. 100 per contract; he is exposed only to basis risk from the change in spread between the two contracts
- b)Rs. 300 per contract; he profits from the outright move in both contracts
- c)Rs. 200 per contract; the margin is lower because both legs are in the same currency
- d)No gain, since both contracts rose
Show the answer
Answer: (a) Rs. 100 per contract; he is exposed only to basis risk from the change in spread between the two contracts
The spread widened from 0.20 to 0.30.
Suppose that the spread widens after 10 days and now the March futures contract is trading at 83.10 while the April futures contract is trading at 83.40, and as a result the spread now stands at Rs. 0.30. He decides to square off both the positions, making a gain of Rs. 100 per contract {(0.30 – 0.20) 1000}.*
Check it leg by leg: the short March loses 0.10 (83 → 83.10); the long April gains 0.20 (83.20 → 83.40). Net +0.10 × 1000 = Rs. 100.
Option D misses that only the difference matters — both legs rising is irrelevant if they rise by different amounts.
Why the margin is lower: in a calendar trade position, the trader does face the risk of underlying security/currency movement but is only exposed to the basis risk due to change in the spread between two contracts. Hence the margin applicable on such positions is much lower than the normal margin.
What a calendar spread is: a trader buys/sells a particular month contract (Futures or Options) and sells/buys (take an opposite position) of the same contract of a different month. Both have the same underlying but different maturities.
What moves spreads: Interest rate differentials · Liquidity in the banking system · Monetary Policy Decisions (Repo, Reverse Repo and CRR).
A rate-driven version of the same trade: a trader has a view that interest rates in India may increase while those in the US may remain flat. This will increase the spread between short-term and long-term USDINR futures contract. Hence, the trader will buy far-month USDINR futures contract and at the same time sell the near-month USDINR futures contract.
One execution warning with its remedy: there is a risk of adverse price movement during the order placement i.e. execution risk. Such risk can be avoided by using spread order facility provided by Exchanges.
2.A buy spread order of 10 lots in USDINR MAR24MAY24 futures means:
- a)Buy 10 lots of March and buy 10 lots of May
- b)Sell 10 lots in USDINR MAR24 futures and buy 10 lots in USDINR MAY24 futures
- c)Buy 10 lots in March and sell 10 lots in May
- d)Buy 10 lots of whichever leg is cheaper
Show the answer
Answer: (b) Sell 10 lots in USDINR MAR24 futures and buy 10 lots in USDINR MAY24 futures
A buy side spread means sell near-month leg (first leg) and buy the far-month leg (second leg).
Buy spread order of 10 lots in USDINR MAR24MAY24 futures means: sell 10 lots in USDINR MAR24 futures and buy 10 lots in USDINR MAY24 futures.
The name refers to the spread, not the legs — which is exactly the trap.
And the reverse: a sell spread order of 10 lots in USDINR MAR24MAY24 futures mean: buy 10 lots in USDINR MAR24 futures and sell 10 lots in USDINR MAY24 futures.
What is being traded: USDINR future MAR24MAY24 spread contract allows participants to trade the difference of price between USDINR MAY24 futures (Far month contract/2nd leg contract) expiry and MAR24 (near month contract/1st leg contract) expiry.
A feature no other contract has: the difference which is shown on the spread contract can be positive, negative, or zero, which is not possible for all other contracts other than spread contracts.
How prices are assigned: Traded price for the first leg contract = Reference price. Traded price for the second leg contract = Reference price + the price difference entered for the spread order, where, the Reference price = Last Traded Price of the first leg contract.
Matching runs on the difference: the orders are matched in the spread order book on price-time priority only, where the price is basically the difference between the far-month contract and near-month contract.
Why use the spread book rather than two orders: the issue with entering a calendar spread trade as 2 separate orders is that there is a risk of adverse price movement between placing of both the orders. The trader is also subject to a higher margin requirement till the second order is executed. Both these issues can be fixed by using the spread order facility.
Where this is taught
Free preparation for NISM Series IRelated terms
- Calendar spread tradingTaking opposite positions in two maturities of the same currency futures (or options) contract to trade the change in the spread between them, rather than the direction of the currency.
- Currency futuresA standardised exchange-traded contract to buy or sell one currency against another on a future date at a price fixed today; in India, cash-settled in rupees, USD 1,000 a lot for USDINR.
- Horizontal spreadTwo options of the same type and the same strike but different expiries — a position whose entire value is the difference between the two legs' time values, not a view on direction.
- Order bookThe live electronic list of unmatched buy and sell orders for a contract, arranged by price level, showing quantity and number of orders at each price — generally up to five price levels a side.
- Execution riskThe risk that a trade does not execute as planned — that prices move between the legs of a strategy, that one leg fails to fill, or that an order fills away from the desired price.
- Inter-bond spreadA long-short position in futures on two different GOI bonds, usually of the same expiry, taken to express a view on how the yield curve will steepen or flatten.
- Diagonal spreadTwo options of the same type on the same underlying with both a different strike and a different expiry — the most complicated of the three spread families, and the only one that varies on both axes.