What are futures spreads?

A futures spread involves simultaneously buying and selling two or more different futures contracts. These contracts are related but differ in some aspect, such as expiration month, underlying market, or asset.

Major exchanges like CME, ICE, and Eurex list many spread instruments that can be traded directly on their own order books separate from the outright futures contracts that make up their component legs. These are called exchange-listed spreads. For example, CME has exchange-listed calendar spreads on equity index futures like the E-mini S&P 500 (ES). CME also has products like the RBOB Gasoline Crack Spread (AR).

Not all spreads are exchange-listed. In some cases, you have to trade two or more instruments independently to gain exposure to the spread synthetically. This is often referred to as a synthetic spread.

A calendar spread involves buying one futures contract and selling another futures contract for the same underlying asset but with different expiration months.

An intermarket spread involves simultaneously taking opposing positions in futures contracts for different underlying assets. Exchange-listed intermarket spreads typically exhibit a strong economic relationship. Intermarket spreads are often traded in energy and precious metals markets. An example is buying a crude oil futures contract and selling a heating oil futures contract, or buying a platinum futures contract and selling a gold futures contract.

An intercommodity spread is an example of an intermarket spread that involves two or more legs with different commodities.

Several factors impact the price differentials within futures spreads:

• Interest rates: Interest rates primarily affect the carrying costs of physical commodities. Higher interest rates increase the cost of financing inventory, which can lead to wider calendar spreads (contango) if storage costs are significant. Conversely, lower interest rates reduce carrying costs, potentially narrowing spreads.
• Storage costs: For physical commodities, storage costs are a direct component of the carrying cost. These costs include warehousing, insurance, and interest on financed inventory. Higher storage costs contribute to wider spreads between near and distant futures contracts, reflecting the cost of holding the commodity over time.
• Seasonality: Many commodities exhibit seasonal price patterns due to predictable fluctuations in production, consumption, or demand. Agricultural products, for example, often show price shifts related to planting and harvesting cycles. Energy products can reflect seasonal demand for heating or cooling. These seasonal tendencies can create predictable patterns in futures spreads.
• Geopolitcal events: Major geopolitical events, such as conflicts, trade disputes, or policy changes, can significantly impact global supply chains and commodity markets. These events introduce uncertainty and can cause rapid and unpredictable shifts in futures prices and their differentials, affecting all types of futures spreads.

Futures spread trading offers several distinct advantages over outright directional trading:

• Reduced volatility: The volatility of a spread position is generally lower than that of its outright futures contract legs.
• Lower margin requirements: Exchanges usually recognize the reduced risk profile and volatility of spread positions, and consequently assign lower margin requirements compared to their constituent outright positions. This allows traders to control a larger notional value with less capital.
• Directional neutrality: Directional movements are notoriously difficult to time and predict. On the other hand, spread strategies aim to profit from relative price movements which may exhibit mean-reverting behavior and may be easier to forecast.
• Transaction costs for rollover: Exchanges usually allow customers to roll an outright futures position forward to another expiration month by initiating a spread position. Unlike legging in by liquidating the existing position and taking exposure into the new expiration in separate transactions, a spread allows the trader to execute the rollover in a single simultaneous transaction, which usually reduces transaction costs.
• Hedging: Futures spreads are an effective tool for hedging. For example, a producer expecting to sell a commodity in a future month might use a calendar spread to lock in a price differential, protecting against unfavorable changes in the basis (the difference between the spot price and the futures price).

• Liquidity: Most exchange-listed spreads are more illiquid than their constituent outright legs. Many spread combinations rarely trade and have very wide bid-ask spreads.
• Legging risk, transaction cost, and complexity for synthetic spreads: If a spread combination is not exchange-listed, taking a position in the spread requires precise timing of execution on separate instruments. Crossing the spread on multiple legs is usually expensive. This also creates more orders which have to be properly managed and allocated on the trading platform or OMS. This becomes more difficult if the trader tries to time the separate executions or use passive orders on 1 or more leg.
• Data, symbology or vendor limitations: As futures spreads are traded less frequently than their outrights, many financial service providers have less mature software or infrastructure for futures spread trading. Many futures data vendors do not provide spreads, and the ones that do may have poor developer ergonomics or trader UX—this often takes the form of symbology issues that make it hard to work with futures spreads.

Implied matching is an exchange matching mechanism that allows liquidity in outright futures contracts to interact with liquidity in exchange-listed spreads, even when orders are not explicitly entered for both.

Beyond futures outrights, Databento provides comprehensive coverage of all futures spreads, user-defined spreads, options on futures on major futures exchanges like CME, CBOT, NYMEX, COMEX, ICE, EEX, and Eurex.

Databento's API gives first-class treatment to both outright and spreads, making it equally easy to work with both. Specifically, Databento's parent symbology allows users to fetch all spreads for a product easily; instrument definitions and settlement-level statistics on futures spreads are also easily available on Databento.

A full list of futures venues covered by Databento can be found here.