Spread Strategies - Calendar, Crack and Crush Spreads on Futures

Hook: How to Profit Without Guessing Oil Direction?

Richest traders in Chicago rarely bet whether oil goes up or down. They bet whether difference between oil and gasoline widens – because they know refinery margins. Or whether Dec vs March wheat spread widens because inventories shrinking.

That’s spread trading. Instead of $2,000 risk on CL outright, you have $400 risk on crack spread. Instead of $8,000 margin on CL, exchange charges $400 on calendar spread. Lower volatility, lower margin but requires math.

In this lesson 4 spreads that build careers of commodity traders.

Table of Contents

1. What is spread on futures?
2. Why spread has lower margin and risk?
3. Formula Spread=Leg1-Leg2*hedge_ratio
4. Calendar Spread - time difference
5. Inter-Market Spread - market difference (Gold vs Silver)
6. Crack Spread - refinery margin
7. Crush Spread - soy processing margin
8. Why it matters for trader?
9. Example: Calendar ZW in PLN + USD
10. Case study: Crack Spread 2022 - war and $60 margin
11. How to apply
12. Common mistakes
13. Practical exercises
14. Checklist
15. Summary and final project

What Is Spread on Futures?

Spread is simultaneous long one contract and short related contract. You profit not on market direction but on change of relationship between them.

Example: Long CL Dec $80, Short CL Mar $82. Spread = Dec - Mar = -$2. If difference narrows to -$0.5 (backwardation decreasing) you earn $1.5 regardless whether oil went 80->85 or 80->75.

Types:

• Calendar (intra-market): same commodity different months
• Inter-market: different commodities e.g., GC vs SI, CL vs NG
• Processing spreads: Crack (oil->products), Crush (soy->meal+oil)

Why Spread Has Lower Margin and Risk?

Exchange (CME SPAN) knows spread less volatile than outright. CL can move 5% daily but spread CL Dec-Mar moves 0.5% because both legs react similar to news.

Thus CME gives margin credit 70-95%.

This allows trading smaller 50k PLN (~$12.5k) account with spreads where outright too risky.

But warning: lower vol doesn’t mean no risk – in 2020 calendar CL exploded $15!

Formula: Spread = Leg1 - Leg2 * hedge_ratio

Basic formula calculating spread value:

Spread = Leg1 - Leg2 × hedge_ratio

Where hedge_ratio = size/risk ratio to neutralize directional exposure.

For physical commodities hedge_ratio comes from process:

Crack Spread 3:2:1

• 3 barrels oil →2 barrels gasoline RB +1 barrel heating oil HO
• Formula:

Crack_(3:2:1 = 3 × CL - (2 × RB + 1 × HO)

But converting to per barrel price (RB and HO quoted gallons, 42 gal per bbl):

Spread_{USD/bbl}= -3*CL +2*RB*42 +1*HO*42

Positive spread = refinery profit per 3 bbl.

Crush Spread

• 1 soybean (60 bu) ~44 bu meal +11 bu oil. In CBOT standard:
• 10 soybeans →11 meal and 9 oil? Different versions. Simplest:

Crush = ZM + ZL - ZS

Standard CBOT: Long 10 ZS, Short 11 ZM and 9 ZL? But for education use 1:1:1.

Hedge ratio for equal dollar exposure:

hedge_ratio = (Multiplier_1 × Price_1/Multiplier_2 × Price_2 × beta

For GC vs SI: GC 100 oz *$2000=$200k notional, SI 5000 oz *$25=$125k. Ratio ~1.6 SI per 1 GC to balance dollar.

Calendar Spread - Time Difference

Most popular spread among beginner commodity traders.

Example: Wheat ZW. You have ZW Dec 650c, ZW Mar 670c. Spread = Dec - Mar = -20c. Market in contango (further more expensive). You think inventories will fall and backwardation returns – want spread increase to -5c.

Profit: -5 - (-20)=+15c *5000 bu=$750 per spread.

When trade?

• Seasonally: right after harvest ZW contango deep – short calendar? Depends.
• Reports: before WASDE spread can widen/narrow 2x.
• Inventories: high EIA → contango deepens → short front spread.

Pros: Low vol margin $150-250 for ZW calendar good for 15k PLN account (~$3,750).

Risk: Flash in one month (squeeze front) can explode spread 10x normally.

Inter-Market Spread - Gold vs Silver

Oldest spread: Gold/Silver Ratio.

Price GC 2000, SI 25 → ratio 80. Historic 40-100. When ratio >90 extreme – silver cheap vs gold – buy spread long SI short GC betting ratio falls.

Dollar neutral formula:

Want $200k exposure each leg: 1 GC=100 oz, 1 SI=5000 oz. At GC 2000 SI 25: 1 GC $200k 1 SI $125k so ratio 1 GC :1.6 SI.

Spread points? On TradingView you can do GC1!/SI1!*ratio.

Crack Spread - Refinery Margin

What: Refinery buys crude CL sells gasoline RB and heating oil/diesel HO. Difference its profit.

3:2:1 Crack: 3 CL ->2 RB +1 HO.

Price USD/barrel:

Crack = -3*P_{CL} +2*P_{RB}*42 +1*P_{HO}*42

Example real numbers: CL 80 RB $2.50/gal (=105 $/bbl) HO $2.70/gal (=113.4 $/bbl)

Crack = -3*80 +2*105 +1*113.4 = -240+210+113.4=83.4 USD on 3 bbl =27.8 USD/bbl margin

Refineries hedge spread: if margin $30 sell crack (short RB+HO long CL) to lock? Actually long products short crude = lock margin. Spec traders look seasonal: summer driving season demand RB rises → crack rises – long crack.

Margin: CME gives 80-90% credit on crack vs outright – about $1,200 vs $8k+$x2.

Crush Spread - Soy Processing Margin

Similar: processor buys soybeans ZS sells soymeal ZM (feed) and soyoil ZL (food/biofuel).

Board Crush: 1 bu soy ~44 lbs meal +11 lbs oil.

Crush_{profit}= (MealPrice *44 + OilPrice *11)/2000?

Simplified CBOT: Long 10 ZS (5k bu each =50k bu) Short 11 ZM (100 short ton) Short 9 ZL (60k lbs). But for education when bio-diesel demand rises ZL outperforms ZS → long crush.

Long crush = buying products (ZM+ZL) short commodity (ZS) – lock processor margin. When margin wide processors sell crush (opposite).

For trader: when meat demand rises (feed ZM) long crush.

Why It Matters For Trader?

1. Smaller account: 20k PLN (~$5k) can’t carry 1 CL outright ($8k margin + $2k risk) but 2 calendar CL ($800 margin+$400 risk) – yes.
2. Less stress: Spread volatility 3x smaller than outright – easier sleep.
3. Fundamental: Crack/crush based on real refinery/processor economics – easier to model than oil direction.
4. Diversification: Spreads often low correlated with ES – good portfolio.

Market Example: Calendar ZW in PLN + USD

Account 30,000 PLN (~$7,500). ZW calendar Dec-Mar.

• Margin: $200 per spread (CME credit)
• Entry: Sell ZW Dec 680c Buy ZW Mar 695c = spread -15c. Expect contango shrink to -5c (drought).
• Move 10c=10*$50? Actually ZW tick $12.50 per 0.25c? 1c=$50. So 10c=$500.
• Stop: if spread goes to -25c (deepens) -10c loss=$500~2,000 PLN.
• Risk $500=6.6% account – too much. Change to 1 spread? Already 1 spread. So reduce risk: stop -20c=5c loss=$250~1,000 PLN=3.3% – still high, account too small for ZW calendar? Need bigger 50k PLN account or narrower stop.

Lesson: even spreads need calc.

Case Study: Crack Spread 2022 War

Feb 2022 Russia attacks. Sanctions on Russian oil and diesel. Europe buys diesel from US.

Price: CL 90->130 RB 2.6->4.0 HO 2.7->5.0. Margin crack 3:2:1 jumps 25 USD/bbl to 60 USD/bbl in 4 months!

Trader long 1 crack 3:2:1 from 30 to 55=+25 USD/bbl3 bbl=+75 USD? Actually per 3 bbl margin 253=75 profit per 3 CL leg? Real example broker: 1 crack 3:2:1 long 30->60 profit ~$30,000 per spread! Margin grew so refineries earned more than ever. Many funds earned hundreds millions predicting diesel shortage.

After war crack back to 30 2023 – short crack earned.

How to Apply

20 min workflow:

1. Choose 1 spread to start: Calendar ZW or GC-SI ratio or ES-NQ.
2. On barchart.com -> Futures Spreads see historical spread charts.
3. Calc hedge ratio dollar: Notional1/Notional2.
4. Calculate margin at cmegroup.com -> Margins -> Spreads.
5. Apply COT: if Managed Money ultra long CL but not long RB – crack may fall – short crack setup.
6. Open on demo: e.g., in TradingView you can’t open spread with one click – must open 2 legs separately but with limits for low slippage.
7. Manage like normal trade: stop on spread not on legs individually.

Excel template: Columns: Date | Leg1 price | Leg2 price | Ratio | Spread value | Margin | P&L | COT filter.

PLN rule: Account 20k PLN → max 1-2 calendar spreads margin used <30% account risk 1%=200 PLN per spread.

Common Mistakes

1. Trading spread as outright. Thinking “oil will rise so long CL and short CL second month also wins”. No – spread may fall even if oil up.
2. Ignoring limits and First Notice. One leg can go limit up other not – spread explodes.
3. Wrong hedge ratio. 1 GC vs 1 SI not neutral – notional diff 60%. Must 1.6 SI per GC.
4. No seasonality understanding. Long NG Dec-Mar in July suicide – seasonal contango.
5. Legging risk: Opening one leg and second not filled – suddenly you have outright with large risk.
6. Micro vs large mixing: 1 big GC vs 1 MGC micro – ratio 10 not 1.
7. Forgetting currencies: DAX vs ES – different currencies (EUR vs USD) – hedge ratio must include EURUSD.

Practical Exercises

Exercise 1: Calculate crack 3:2:1 for CL 85 RB 2.80 HO 3.00. Convert RB/HO to USD/bbl: 2.842=117.6 3.042=126. Crack=-385+2117.6+126=-255+235.2+126=106.2/3=35.4 USD/bbl. Is margin high or low vs hist avg 20?

Exercise 2: Account 40k PLN (10k USD). Calendar CL Dec-Mar margin $600. Want risk 1%=400 PLN$100. Spread ATR 0.3 USD=30 ticks*$10=$300 too large. How reduce? Use MCL calendar – tick $1 – ATR $30 OK. How many spreads? 100/30=3? Actually $30 risk per spread – you can 3 micro spreads ->$90 risk.

Exercise 3: Find on TradingView chart: COMEX:GC1! / COMEX:SI1! *100? Analyze ratio 2 years. Where was >90?

Exercise 4: Build crush spread in Excel: buy 1 ZS (5k bu @1300c=13.00$→$65k) sell 1 ZM (100 ton @400$/ton=$40k) and 1 ZL (60k lbs @0.6$=$36k). What P&L if ZS +5% ZM +8% ZL +10%? Calc.

Checklist Before Entering Spread

• Defined legs and hedge ratio (dollar neutral + beta)
• Checked margin for spread not separately – have 80-90% credit
• Checked First Notice both contracts – not entering delivery
• Know whether spread quoted in points or USD/bbl and how calc P&L
• Checked seasonality – right month for this spread?
• Checked COT for both legs – divergence supporting spread?
• Avoid legging – open both legs with limits simultaneously or use market spread order
• Risk calculated on spread not legs – stop on spread value
• PLN account – include EUR/USD if 1 leg EUR (DAX)

Summary and Final Project

Spread trading is essence of professional commodity trading. Instead of guessing direction you trade relationship which has economic reason: refinery margin (crack), processor margin (crush), storage cost (calendar) or relative strength (inter-market).

Formula Spread=Leg1-Leg2*hedge_ratio key. Hedge ratio neutralizes direction and leaves pure difference. Margin 80-90% lower 3x lower volatility but legging and limit risk real.

Final project whole Course 27:

1. Choose 3 markets: GC, CL, ES.
2. For each download COT (Disaggregated/TFF) and calc 3Y percentile.
3. Check contango/backwardation curve M1 vs M12 – note %.
4. For 50,000 PLN account calc position: 1 MES+1 MCL+1 MGC or 1 ZW calendar spread – with 1% risk.
5. Propose 1 spread: e.g., long crack 3:2:1 if margin <25 or short GC/SI ratio if ratio >88.
6. Write 1 page A4 trading plan with checklist from each lesson.

Congratulations! You passed hardest futures course. Remember: professional wins because process not because guess oil. Process = COT + curve + spec + margin math + spread edge.

Trade smart count in PLN respect leverage and never skip First Notice. See you on market!