The Calendar Spread

Key Takeaways

1. 1A calendar spread pairs a long position in one futures contract month against a short in another — it trades the shape of the futures curve rather than outright price direction
2. 2Spreads profit from convergence: as contracts approach expiry they naturally move toward each other, creating trading opportunities without requiring a full outright position
3. 3In contango markets, traders buy forward months and short near months when the spread exceeds storage costs, capturing an arbitrage between the curve and real carry costs
4. 4In backwardation, traders short expensive near-month contracts and buy cheaper forward months, profiting if the curve normalises as the supply squeeze eases
5. 5Calendar spreads are capital-efficient — offsetting legs significantly reduce margin requirements compared to holding an equivalent outright futures position
6. 6Traders can take explicit views on curve steepness: buying a spread bets on flattening, selling a spread bets on steepening, independent of whether the outright price rises or falls
7. 7Professional traders extend this to butterfly and condor spreads, isolating specific curve segments while hedging the rest — useful for targeting a single month's supply or storage anomaly
8. 8Producers and processors use calendar spreads to hedge physical inventory and lock in processing margins systematically, not just for speculative purposes
9. 9Key risks include unexpected supply disruptions that invert the curve, margin calls during interim adverse moves, and basis risk when contract months are illiquid