Intercommodity Spread

An intercommodity spread involves simultaneous long and short positions in different but related commodity futures contracts with usually the same settlement date.

It is to be distinguished from intracommodity or calendar spreads (combination of futures on the same underlying but different settlement dates) and interexchange spreads (combination of futures contracts on the same underlying, which are traded on different exchanges).

Intercommodity spreads are mainly used for speculation by entering sophisticated economic positions in commodity markets. Examples are crack spreads and crush spreads. The name crack spread comes from the fact that oil needs to be “cracked” to produce refined products such as gasoline and heating oil.

The investor takes a long position in crude oil futures and a short position in refined products. Thus, the strategy profits from changes of the differences of futures prices. It synthetically creates the profit and loss situation of an oil refinery.

Meanwhile, New York Mercantile Exchange (NYMEX) also offers options on crack spreads. Similar ideas apply to the crush spread: A trader takes a long position in soybean futures and a short position in soybean meal and oil futures.

This position matches that of a soybean processing company. Intercommodity spreads are less seriously affected by shocks to the market as a whole than outright positions in a single futures contract.

Therefore, they are sometimes perceived to be less risky. However, one has to keep in mind that the losses due to adverse changes of the price difference may be higher than single (outright) futures positions. Furthermore, margin requirements might be reduced due to the offsetting nature of the contracts.