Futures Spread: how the position works
Long one futures contract and short a related one, so the position profits from the difference between them rather than from the direction of either. Because the two legs share most of their risk, a shock that moves the whole market largely cancels. Exchanges recognise this and charge dramatically less margin for a recognised spread than for the two legs held separately.
- Market view
- Relative value — non-directional
- Opened for
- Margin
- Maximum profit
- Bounded by how far the differential can move, which is a question about the market's structure rather than a formula. Physical arbitrage limits often cap it in practice.
- Maximum loss
- Likewise bounded by the differential rather than by a strike. It is not defined risk, and a spread can move far further than its history suggests.
- Breakeven
- The differential at entry, adjusted for costs.
How it is built
- Buy 1 futures contract in one delivery month or product
- Sell 1 related futures contract, usually as a single exchange-recognised spread order
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
Delta-neutral to the shared underlying and fully exposed to the relationship between the legs. The risk that remains after the common factor cancels is the whole position, which is why spreads are quoted, traded and margined as one instrument rather than two.
When to use it
When you have a view on a relationship — one month against another, one grade against another, one location against another — and no view on the outright level. It is also the standard way to roll an expiring position forward without being flat in between.
What goes wrong
- Leverage is much higher because margin is much lower. The reduced margin reflects reduced volatility, not reduced risk per dollar committed, and the two are easy to confuse.
- Spread relationships can break. A supply shock, a storage constraint or a delivery squeeze can move a differential further than any historical range.
- Legging in or out separately destroys the margin offset and briefly exposes the full outright risk of both legs.
A worked example
Long 1 ES September contract at 5,800, short 1 ES December contract at 5,845.
- Spread at entry
- −45 points (September minus December)
- Value of a 1-point change in the spread
- $50
- Profit if the spread narrows to −30
- $750 (15 points × $50)
- Loss if the spread widens to −60
- $750
- Margin
- Far below the sum of the two outright requirements
Commissions, exchange fees, financing and the bid/ask spread are excluded. On a multi-leg position the spread is usually the largest of these. Enter as a single spread order to obtain the margin offset and avoid legging risk.
Common questions
Why is the margin so much lower?
Because the exchange recognises the offsetting risk between the legs. The common market factor largely cancels, so the residual volatility of the spread is a small fraction of either leg — and margin is sized to that residual.
Related strategies
- Futures Calendar SpreadTerm structure — non-directional
- Futures Inter-Commodity SpreadRelative value — processing or substitution margin
- 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.