Please sorry my ignorance but Iím new to spread trading and am trying to understand some specific points about exchange recognized spreads (not custom spreads). I tried to google my questions but search returned no results. The questions are rather theoretical. But I donít want put real money at risk without certain knowledge.
1. If you buy IC spread contract (e.g. WTI-Brent on ICE) and decide to buy the same month outright Brent later, does it necessarily result in closing Brent position (even if the Brent leg in the spread was a part of an exchange traded strategy)?
2. The same point for buying or selling consecutive calendar spreads. E.g. beans F4-H4 and H4-K4 have a common leg H4. Could both H4 legs be wiped out as a result? What happens to the spreads then?
3. If such a situation occurs, who is responsible for liquidation of crossing positions Ė FCM or exchange?
Broker/Data: Deep Discount Trading/Rithmic,DeCarley/Gain
Favorite Futures: Future Options
Posts: 35 since Sep 2012
Thanks: 46 given,
Hi Steve G,
If you are trading a crude diff product, the product is the difference between the the two underlyings, and not the individual contracts themselves, so entering an outright will not affect it.
For the bean spread, if you are doing it by entering individual contracts then yes the common opposing legs will close each out out and in the example you have given, you will end up with a F4-K4 spread instead.
thank you for the clarification.
Re beans I was talking about exchange traded spreads, not individual contract combinations which aka custom spreads. For example, exchange strategies ZSF14:H14 and ZSH14:K14 or F.US.ZSExxxx (latter in CQG symbology).
1. In most cases exchange spreads be they inter- or intra- commodity will result in you receiving two separate/individual/outright futures and NOT a single future on the spread. The ICE WT-Brent spread you reference when traded will yield both a ICE WTI Future and a ICE Brent Future and NOT a future on the spread. Hence if you enter into an offsetting WTI Future trade, you will be left with the outright Brent future. (Google ICE PRODUCT GUIDE BRENT-WTI FUTURES SPREAD and you can see the product spec. I can't link it as I'm a new member)
Units of Trading:
1 Lot is 1,000 bbls (42,000 US gallons).
The Inc Qty and Minimum Qty is 1 lot
Buying 1 ICE Brent-WTI Futures Spread Lot results in a 1 Lot buy of WTI and 1 Lot Sell of Brent
As Harvard16 mentioned there are some cases where this is not the case, but these are the exception rather than norm. I think you will also find that in most cases these exceptions trade OTC and are then cleared through the exchange rather than trading on the exchange directly. CME's LLS-WTI spread and ICE's Dated Brent - Brent 1st Line spreads are examples.
2. Buy F4-H4 = Long F4 short H4.
Buy H4-K4 = Long H4 short K4
Both Both = Long F4 short K4, ie you have a F4-K4 spread.
There is no 'could they be wiped out' they will be, there will be no H4 left at all.
3. From this perspective they are effectively they same. In the example in 2. above your account will show an F4 buy, and H4 buy and sell (with associated profit) and a K4 sale. Your open positions at end of day will only show F4 and K4.
The following user says Thank You to SMCJB for this post:
Exchange trades spreads are traded as a single product but in the daily settlement report, there will be 2 contracts long and short although its traded as a single product.
Buying 2 consecutive calenders in beans will be overall long F4-K-4 spread as H4 cancels out.....one important thing would be the spread matrix is quite useful to check which spreads are easier to enter eg. If you want to enter a butterfly F4-H4-K4 and the exchange traded flys have poor liquidity, you may buy F4-H4 and sell H4-K4 to enter the fly(+1-2+1) as calenders have a better liquidity for entries.