Spreads

In commodity trading, the difference in price between two different futures contracts is called a spread. This actually helps in taking advantage of price differential between two contracts, while protecting an investor in the market from any volatile movement.

For example, let us take the closing price of castorseed September and November futures on the National Derivatives and Commodities Exchange on Tuesday. September contracts closed at ₹4,218 a quintal, while November ended at ₹4,360.

To take advantage of this difference, an investor can sell one unit of November contract and buy one unit of September contract.

Similarly, if there is a problem in the spot market, the near-term futures contract will rule higher, while far-term will quote lower. In this, the spread can be achieved by selling the near-term futures contract and buying the long-term one.

The catch here is squaring off of the buy and sell contracts to ensure that one gains the maximum from such strategies.

This is a simple strategy. As an investor gets used to the strategy, he/she would be emboldened to try other combinations. There are spreads such as condor, crack and crush. Condor is for taking advantage in options trade, which is not available on commodity exchanges in the country currently.

Crack spread is taking advantage of the price differential in the price of crude oil and petroleum products. Crush spread is the difference in prices or opportunity available in the soyabean market, trading in its products such as bean, oil and meal.

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