A calendar spread futures contract is a type of derivative that allows traders to bet on the difference between the prices of two futures contracts with different expiration dates. For example, one could buy a calendar spread futures contract on the intermonth spread of crude oil futures, which means buying a longer-term crude oil futures contract and selling a shorter-term crude oil futures contract at the same time. The profit or loss of this trade depends on how the price difference between the two contracts changes over time.
Calendar spread futures contracts have several advantages over trading the individual futures contracts separately. First, they reduce the transaction costs and the risk of executing the two legs at different prices, since they are traded as a single unit. Second, they allow traders to express a view on the shape of the futures curve, which reflects the market’s expectations of future supply and demand conditions. Third, they can be used to hedge against changes in the futures curve, such as when a producer wants to lock in the margin between the production cost and the future selling price of a commodity.
Calendar spread futures contracts are available for various underlying assets, such as commodities, currencies, interest rates, and equity indices. They are traded on exchanges such as CME Group, which offers calendar spread futures on products such as Treasury futures, FX futures, and energy futures. The price of a calendar spread futures contract is quoted as the difference between the prices of the two underlying futures contracts, and it is usually expressed in ticks or basis points. The contract size, tick size, and tick value vary depending on the underlying asset and the exchange. The settlement of a calendar spread futures contract is cash-based, meaning that the difference between the final settlement price and the initial trade price is paid or received by the trader.
Basic Theory
A calendar spread aims to profit from the relative price movements of near-month and far-month futures contracts. Traders anticipate changes in the supply-demand dynamics, interest rates, or other factors that may affect the pricing structure over time. The spread can be either a “calendar call spread” (bullish) or a “calendar put spread” (bearish), depending on the market outlook.
Procedures
Step 1: Data Collection
- Obtain historical price data for the specific futures contract.
- Identify the near-month and far-month contracts you want to trade.
Step 2: Calculate Spread Prices
- Determine the prices of the near-month and far-month contracts.
- Calculate the spread by subtracting the near-month price from the far-month price.
Step 3: Create Excel Formulas
- Open Excel and set up a table with columns for date, near-month price, far-month price, and spread.
- Input the historical data into the table.
Step 4: Analyze the Spread
- Use Excel functions to calculate moving averages, standard deviations, or other relevant metrics.
- Apply technical analysis or other methods to identify potential trading signals.
Real-world Scenario
Let’s consider a scenario involving crude oil futures contracts. Assume the following prices for near-month and far-month contracts on specific dates:
| Date | Near-Month Price | Far-Month Price |
|---|---|---|
| 2024-01-01 | $60 | $62 |
| 2024-02-01 | $61 | $63 |
| 2024-03-01 | $62 | $64 |
Excel Formulas
- Spread Calculation: Spread = Far-Month Price – Near-Month Price
- Moving Average: Utilize the Excel formula
AVERAGEto calculate the moving average of the spread.
Results
The calculated spreads and moving averages will provide insights into potential trading opportunities. For instance, a rising spread may indicate a bullish signal.
Other Approaches
- Options Strategies: Consider incorporating options to enhance risk management or create more complex strategies.
- Dynamic Hedging: Continuously adjust the position to adapt to changing market conditions.
- Market Sentiment Analysis: Use external factors like news sentiment or economic indicators to refine trading decisions.
