Spreads and Relative Value · Futures Trading Guide
Related markets do not necessarily have matching units or risk. An intercommodity spread begins with the economic relationship and a defensible ratio.
Identify the shared driver and the difference
An intercommodity spread might compare substitute crops, related fuels or metals used in similar production processes. The thesis concerns relative prices, not merely whether both markets usually rise together. Supply specific to one commodity can change the relationship permanently. Historical correlation alone does not explain why a spread should return to a former level.
Put the contracts into comparable units
Suppose fictional contract A represents 100 units and contract B represents 50 units. A physical one for one relationship needs one A against two B contracts. At prices of 60 and 55 per unit, those positions have notionals of $6,000 and $5,500. Matching quantity therefore does not automatically match notional value, volatility or sensitivity to the relevant economic driver.
Translate the view into a cash scenario
Buy one A and sell two B in that example. If A rises to 63 while B rises to 56, the long gains $300 and the shorts lose $100, for $200 gross profit. If B instead rises to 60, the net result is a $200 loss. The overall direction of both prices is insufficient to predict the spread outcome.
Choose and maintain the ratio deliberately
A production ratio, value ratio, regression estimate or risk sensitivity ratio answers a different question. Record the estimation window and how often the ratio can change. Rebalancing creates turnover and costs. Stress a break in the historical relationship, different settlement currencies and unequal market hours. Avoid calling a spread arbitrage when delivery, conversion or financing prevents a reliable offset.
Try it yourself
Contract X represents 200 tonnes and contract Y represents 50 tonnes. How many Y contracts match the physical quantity of three X contracts?
Show the worked answer
Twelve Y contracts match 600 tonnes. Further analysis is still required to match economic risk and quality specifications.
Further reading
- CME Group: Grain intercommodity spreads
- CME Group: Futures spread overview
- CME Group: Contract specifications
Educational material. Prices, margins and strategy examples are hypothetical unless explicitly identified as contract specifications. They are not trade recommendations. Futures losses can exceed deposited collateral. Product terms and eligibility vary by venue and jurisdiction.
