Metals Intramarket spreads

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Intra market spreads, also known as calendar or time spreads, are where a trader opens a long or short position in one contract month and then opens an opposite position in another contract month in the same futures market on the same exchange.

For example, long Copper futures May and short Copper futures August on COMEX. Essentially they allow traders to express a view on the expected value of assets at different points in time.

Forward Curve Structure and Carries

Traders can express a view about the structure of a metals forward curve. If you expect nearby contract to rise in value relative to the back end of the curve, you can buy that nearby contract and take an opposite position in a long-dated month to benefit from the change in the relationship and the forward curve. Carries may be used to manage futures potions hedges against a change in the underlying physical market being hedged.

Example

If you planned to buy a physical metal for future delivery in November, you would be worried about price changes from now until delivery. In order to hedge this price risk, you would enter into a long futures contract for the same product, also with a delivery date of November. But what happens if the delivery date for your physical metal changes to December?

In order to maintain the hedge, you will need to move the futures position to December. To do this you would sell the November versus December spread. In other words, you would sell the November contract and buy the December contract. The net position of would be a long December futures contract, matching the new physical metal delivery date.

Less Volatility than Outright Futures

Intra market spreads offer a trader exposure to the price of a metal, but with reduced volatility because the time spread tracks changes in relationship between the two contracts, rather than the price of the outright futures contract. The risk is the change in the forward curve impacts the two open positions at different rates, but the difference between the two open positions will be less than the outright value and thus such spreads are less volatile.

Reduced Margin Requirements

If a trader expresses a view on the relative value of metals futures by trading an intra market spread, they may see reduced initial margin requirements. Initial margins may be lower for spreads because of the reduced volatility. For example, the maintenance margin required for one lot long Copper futures Feb versus short Copper futures August on COMEX might be $200 per lot. The outright one lot long Copper futures Feb could be around $3,100 per lot.

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Regards,
Peter Knight Advisor

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