Futures Calendar Spreads and Butterfly Arbitrage
Summary
The document explains calendar spread arbitrage: taking opposite positions in different delivery months of the same futures contract when their price relationship departs from its usual range. It describes bull spreads, which buy the nearer month and sell the deferred month, and bear spreads, which reverse those positions. The proposed premise is that spreads may return toward a historical relationship, though convergence is uncertain and the opportunity can be brief.
It also introduces butterfly spreads, combining two calendar spreads across near, middle, and distant expiries, with the middle-month position sized to balance the wings. A corn example illustrates a bear spread whose intermonth price difference widens as prices fall. For a practical process, it recommends selecting related contracts, estimating spread boundaries, entering on threshold crossings, and exiting at a stop or near the mean. It emphasizes understanding supply, demand, storage, seasonality, and weather, and notes that the approach is more applicable to storable commodities than livestock. The text gives conceptual guidance and an illustrative trade, not systematic performance evidence; its simplified market descriptions do not guarantee low risk or profits.
Key ideas
- Calendar spreads pair opposite positions in different delivery months of the same futures market.
- A bull spread buys the nearer contract and sells the deferred one; a bear spread reverses that position.
- The strategy relies on a view that the intermonth price relationship will move toward or away from a typical level.
- A butterfly combines two opposing calendar spreads around a shared middle expiry.
- Supply, demand, storage, seasonality, and other product-specific factors can affect spread behavior and risk.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.