Spread Trade (Commodities)
A trade that goes long one commodity contract and short a related one — exploiting price relationships between grades, delivery months, or related products.
A commodity spread trade is the simultaneous purchase of one futures contract and sale of a related contract, profiting from the change in the price differential rather than the absolute price level. Because both legs move together in the same direction on broad market moves, spread trades are lower-volatility and lower-margin than outright positions.
Key commodity spread types:
- Calendar spreads: same commodity, different delivery months (front-back). Exploits contango/backwardation shifts.
- Inter-commodity spreads: related commodities (WTI vs Brent, gold vs silver). Exploits relative value.
- Crack/crush spreads: raw input vs processed output. Exploits processing margin.
- Location spreads: same commodity at different delivery points. Exploits transport and storage differentials.
Example
A trader believes the Brent-WTI spread will widen from $4 to $7 due to US inventory builds. They buy one Brent futures contract at $82 and short one WTI contract at $78. Three weeks later: Brent $83, WTI $76. Spread moved from $4 to $7 — a $3 profit per barrel, or $3,000 on a 1,000-barrel contract.
Related Terms
Futures Curve
The graph of futures prices across successive delivery months for a commodity, revealing whether the market is in contango or backwardation.
IntermediateGold/Silver Ratio
The number of silver ounces required to buy one ounce of gold — a measure of relative precious metal valuation that traders use to rotate between the two.
IntermediateSeasonality
Recurring, calendar-driven price patterns in commodities caused by predictable cycles in supply (harvest) and demand (weather-driven consumption).
IntermediateSpot-Futures Basis
The difference between the spot price and a futures price for the same commodity — the numerical expression of carry, storage, and convenience yield.
Intermediate