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Commodity spreads 3: What are commodity spreads?

20 Nov 2017,

In this part of our series, we are finally getting to my favourite commodity spreads. I remember my beginnings very vividly and it is true that this name can discourage someone. Stocks, bonds or currencies are better known, and it is possible to imagine something under their names. Commodity spreads are perhaps a bit more complicated for beginners, so in the following articles I will try to reveal the secret behind them.

 

First, let´s repeat something

We already know that commodities are products that are traded on the commodity exchange through so-called futures contracts. It is for example corn, wheat, cocoa, sugar, cotton…

And “spread” means a common difference. When we put it together, we get to the point of commodity spreads – it is simply a difference between two different futures contracts. Of course, I mean the price difference.

Several types of commodity spreads are known:

  • interdelivery spreads
  • intermarket spreads
  • interexchange spready

 

Let´s be more specific

  • Interdelivery spreads – Difference between two futures contracts within one commodity. For example, the difference between the corn contract in July and December (ZCN18-ZCZ17).

 

 

  • Intermarket Spreads – The difference between two futures contracts of two different commodities. For example, the difference between March corn and March wheat (ZWZ18-ZCZ18).

 

 

  • Interexchange spreads – the difference between two futures contracts, which represents similar commodities on different commodity exchanges. For example, the difference between the March wheat traded in the Kansas Commodity Exchange and the March wheat traded in Chicago (ZWH17-KEH17).

 

 

I have added graphs of specific spreads for explanation. As you can see, the chart looks the same as for stocks, bonds, or even commodities. There are also different trends where we can make a good profit.

What was my problem at the beginning?

I had many questions at the beginning: How can I make a profit on difference? How can I imagine this difference and how can I trade it? Do I have to watch the prices of two contracts? Or do I have to count these prices myself and work in some mysterious way?

Luckily, it is not as complicated as it seems at first glance. As I wrote in the first part of the series, trading commodities makes sense. And also spreads makes sense. Spread movement has its reason, and its logic, and I enjoy it very much. Using useful analyses, we can predict future market movements.

I will try to explain everything in this series. Commodity Spreads are great thing and it would be a pity for a beginner to be discouraged just because of their name.

What’s next?

Next time, I tell you why I do not trade the commodities themselves and why I chose just commodity spreads. Thanks to their advantages, they have a lot of interesting features that are just perfect fo me.

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2 Comments

    1. Quastic

      Thank you and we hope you will enjoy also other parts of the series…

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