Essay on Spread: Futures Contract and Futures Spread Position

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A futures spread position involves the simultaneous buying and selling of two different futures contract months within the same commodity. A futures spread position may also combine the buying and selling of futures contracts that are different but related. Futures spreads may be used to reduce the amount of required margin to trade in a commodity. In a futures spread, you are usually trading a closer futures contract month against a further-out futures contract month in a particular commodity. This strategy is also known as a calendar spread.
The graph below is an example of a futures spread in which the trader entered into a Long July
2007 Corn vs. Short December 2007 Corn futures spread position during the Summer of 2006.
The graph plots the difference in price between the two corn contracts over several months. In this strategy, the trader is buying July ‘old-crop’ Corn and selling December ‘new-crop’ Corn. In utilizing this bullish futures spread strategy, the trader is projecting that the Corn market is going to increase in value and enters into the July-December ‘bull futures spread’ in Corn. The July
Corn futures contract is the last contract each year to trade the old-crop Corn and the December
Corn futures contract is the first contract representing the new-crop Corn that comes with harvest time in the fall. ‘Carry-over’ is a term for un-used old-crop Corn ‘carried over’ and added to the supply of the most recently harvested new-crop

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