Commodity Futures–Spot Arbitrage and Spread Monitoring
Summary
The article distinguishes futures–spot arbitrage from calendar and cross-market spread trades. In a futures–spot position, a trader buys the commodity in the spot market and sells futures when the futures premium is considered unusually wide, expecting convergence as delivery approaches. It describes closing both legs or holding through delivery, and contrasts this convergence mechanism with spreads between different delivery months, which may remain dislocated.
The practical section focuses on monitoring commodity futures prices, spot prices, and their spread with historical fundamental data and charts. It outlines retrieving the futures close and spot and spread series, then plotting them together. The article emphasizes that implementation requires workable spot sourcing, delivery and warehouse arrangements, taxes, and transaction costs; its discussion gives a historical tax range and suggests hedge sizing may need adjustment. The claimed theoretical low risk depends on convergence and feasible execution, while real-world costs and access constraints can materially affect profitability. Historical spread behavior should not be assumed to persist.
Key ideas
- Futures–spot arbitrage pairs a spot position with an opposing futures position to target convergence near delivery.
- Calendar spreads involve contracts for different delivery months and do not have the same convergence constraint as futures versus spot.
- The spread is defined as the futures price minus the spot price.
- Monitoring requires time-aligned futures, spot, and spread data, which can be displayed in charts.
- Taxes, storage, transport, trading costs, delivery access, and hedge sizing can materially change the trade’s economics.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.