Futures Inter-Commodity Spread: how the position works
Long one product and short a different but economically linked one — crude against its refined products, soybeans against oil and meal, corn against ethanol. The spread usually represents a real processing margin that somebody in the physical market earns or pays. That is what separates it from a statistical pairs trade: there is a plant somewhere whose economics enforce the relationship.
- Market view
- Relative value — processing or substitution margin
- Opened for
- Margin
- Maximum profit
- Bounded by how far the processing margin can move. Sustained levels far above the cost of processing bring more capacity online, which pulls it back.
- Maximum loss
- Bounded by the margin moving the other way, and negative processing margins do occur — plants run at a loss or shut, and the spread can stay adverse for as long as that persists.
- Breakeven
- The spread level at entry, adjusted for costs.
How it is built
- Buy N contracts of the input product
- Sell M contracts of the output product, in the ratio the physical process actually uses
All figures above are quoted per share and settle at expiry. A standard equity option covers 100 shares, so multiply by 100 for a single contract.
Before expiry: the Greeks
Neutral to the common commodity factor, exposed to the relationship between the two products. The contract ratio is load-bearing: a 3:2:1 crack spread is three crude against two gasoline and one heating oil because that approximates a refinery's actual yield, and getting the ratio wrong leaves an unintended outright position.
When to use it
To trade refining, crushing or processing economics, or to hedge them if you are in that business. Seasonal demand — gasoline into summer, heating oil into winter — is the usual source of a view.
What goes wrong
- Ratio error is the characteristic mistake here, and it converts a spread into a leveraged outright position without announcing itself.
- The legs are different products with different liquidity, delivery locations and contract months, so they can dislocate for reasons unrelated to the processing margin.
- Refinery outages, weather and policy changes move these spreads violently and without warning.
A worked example
A 3:2:1 crack spread. Long 3 crude oil contracts, short 2 gasoline and 1 heating oil.
- What it represents
- A refinery's gross margin from processing three barrels of crude
- Ratio
- 3 crude in, 2 gasoline and 1 heating oil out — an approximate real yield
- Typical quotation
- Dollars per barrel of crude input
- Profit driver
- Refined product prices rising faster than crude
- Seasonal pattern
- Gasoline cracks usually firm into the summer driving season
Commissions, exchange fees, financing and the bid/ask spread are excluded. On a multi-leg position the spread is usually the largest of these. Note: this calculator prices the crack spread correctly, but the plain-English assistant was never trained on commodity roots and will not parse it — build the legs directly.
Common questions
Why 3:2:1?
It approximates the yield of a typical refinery: three barrels of crude produce roughly two of gasoline and one of distillate. The ratio is a rough industry convention, not a physical constant, and other ratios such as 5:3:2 are used where the yield differs.
Related strategies
- Futures SpreadRelative value — non-directional
- Futures Calendar SpreadTerm structure — non-directional
- Futures OutrightDirectional — leveraged, linear
- Futures Basis TradeArbitrage — carry capture
Educational only. This page explains how a structure behaves; it is not a recommendation to trade it. Options and futures carry substantial risk, and short and leveraged positions can lose more than the amount originally invested.