Inter-Commodity & Calendar Spreads

What Is a Calendar Spread? Understanding the Basics

A calendar spread - also called a time spread or intra-commodity spread - involves buying a futures contract for one delivery month and simultaneously selling a futures contract for the same commodity for a different delivery month. Both legs are on the same underlying commodity; only the expiry dates differ. The trader profits if the price difference between the two months changes in the anticipated direction.

Consider gold futures on MCX. MCX typically lists gold contracts expiring in February, April, June, August, October, and December. Suppose you buy the August gold contract and simultaneously sell the June gold contract. You are now long a calendar spread. If the August contract gains more (or loses less) than the June contract, the spread widens and you profit. If June outperforms August, the spread narrows and you incur a loss.

The price difference between two delivery months for the same commodity is called the spread value or basis between the two months. Under normal market conditions - where storage costs, financing costs, and insurance are positive - far-month contracts tend to trade at a premium to near-month contracts. This situation is called contango. When near-month contracts are more expensive than far-month contracts - often seen in supply-disrupted or seasonally tight markets - the market is said to be in backwardation.

For a calendar spread trader, understanding whether a market is in contango or backwardation, and how that structure is likely to evolve, is central to forming a view. A trader who believes the market will shift from contango toward backwardation would expect near-month contracts to strengthen relative to far-month contracts, narrowing the positive spread. Conversely, a trader expecting tighter near-term supply to ease might anticipate the market moving from backwardation toward contango.

On MCX, calendar spreads are common in crude oil, gold, silver, copper, and natural gas. These commodities have active contracts across multiple months, giving traders sufficient liquidity in both legs to enter and exit efficiently. NCDEX offers calendar spreads in agricultural commodities like soybean, chana, and mustard seed, where seasonal harvest cycles create predictable, albeit volatile, shifts in the near-month versus far-month relationship.

One practical advantage of calendar spreads is that they often attract lower margin requirements on exchanges that recognise the offsetting nature of the two legs. Because the trader has a long and a short position in the same commodity, the net price risk is substantially lower than two outright positions. MCX has, from time to time, offered reduced spread margin for recognised calendar spread combinations, though traders should always verify current margin requirements directly with their broker or on the MCX website, as these can be revised periodically.

It is also important to note that the near-month contract will expire before the far-month contract. A calendar spread trader who does not want to take or make delivery of the physical commodity must roll or close the position before the near-month contract enters its tender period. Managing contract expiry is one of the most operationally important aspects of calendar spread trading that beginners often underestimate.

What Is an Inter-Commodity Spread? Profiting From Economic Relationships

An inter-commodity spread, as the name suggests, involves futures contracts on two different but economically related commodities. The trader goes long one commodity and short another, expecting the price ratio or price difference between them to move in a specific direction. Unlike a calendar spread, the two legs here involve genuinely different underlying assets, which means the positions carry somewhat more independent price risk.

The most classic inter-commodity spreads traded globally and in India include the gold-silver spread (sometimes expressed as the gold-to-silver ratio), the crude-oil-to-natural-gas spread, and within agricultural markets, spreads like soybean versus soybean oil or soybean versus soybean meal, which together capture the crushing margin - the economic value of processing the raw crop into its products.

Let us explore the gold-silver spread in the Indian context. Both gold and silver are traded actively on MCX. Historically, the two metals are closely correlated because both are regarded as stores of value and monetary metals. However, their correlation is imperfect. Silver also has significant industrial demand (for solar panels, electronics, and photography), which introduces a cyclical growth component absent from gold. When economic optimism rises, silver often outperforms gold because of industrial demand; during risk-off periods, gold tends to outperform. A trader who believes industrial activity will accelerate might buy silver futures and sell gold futures, expecting the gold-to-silver price ratio to compress.

The gold-to-silver ratio is calculated by dividing the price of one gram (or troy ounce) of gold by the price of the equivalent quantity of silver. When this ratio is historically high, silver is considered relatively cheap versus gold, and traders sometimes take positions anticipating mean reversion. When the ratio is historically low, the opposite trade is considered. However, it is crucial to understand that mean reversion can take a long time, and historical averages are not guaranteed to hold in any particular future period.

The crude oil and natural gas spread - sometimes informally called the oil-to-gas ratio - captures the relationship between two major energy commodities traded on MCX. Crude oil and natural gas are related as energy sources; they can substitute for each other in certain industrial and power-generation applications, though they serve largely different end markets. Their spread fluctuates with winter heating demand, monsoon-season industrial activity, refinery run rates, and global LNG price dynamics. A trader who believes natural gas prices have fallen too far relative to crude oil might buy natural gas futures and sell crude oil futures on MCX, expecting the ratio to normalise.

In agricultural markets on NCDEX, the soybean crush spread is a well-known inter-commodity strategy. A crusher buys raw soybeans, processes them, and sells soybean oil and soybean meal. The crush spread measures the economic margin of this processing activity. Processors use crush spreads both as a hedging tool (locking in processing margins) and as a speculative vehicle. Traders who believe crushing margins will expand buy the spread - long oil and meal, short beans - while those expecting margin compression do the opposite.

Inter-commodity spreads require the trader to properly size the two legs. Because the two commodities trade at very different absolute price levels and different contract lot sizes, simply buying one lot of gold and selling one lot of silver does not create an economically balanced position. The trader must calculate a hedge ratio that equalises the monetary value or price sensitivity of the two legs. Failing to do so introduces an unintended directional bias to the position.

How the Spread Value Is Calculated and What Drives It

Understanding what actually determines a spread value - and why it changes - is essential for any trader who wants to move beyond mechanical strategy descriptions to genuine market insight.

For a calendar spread, the theoretical spread between two delivery months of the same commodity is determined by the cost of carry - the costs associated with holding the physical commodity from the near-month delivery date to the far-month delivery date. These costs include financing (the interest cost on capital tied up in the commodity), storage (warehouse or vault charges), insurance, and any convenience yield (the non-monetary benefit of having physical inventory immediately available).

The textbook formula is: Far-Month Price = Near-Month Price × e^(r+s-c)×t, where r is the risk-free interest rate, s is the storage cost rate, c is the convenience yield, and t is the time between the two delivery months. In practice, traders use a simplified version: the calendar spread should approximately equal the near-month price multiplied by (r + s) × t minus the convenience yield. When actual market spreads deviate significantly from this theoretical value, arbitrage opportunities can emerge - though execution costs and basis risk usually prevent risk-free arbitrage for retail traders.

In contango markets, the far-month price exceeds the near-month price, and the spread is positive (from the long far-month, short near-month perspective). In backwardation, the spread is negative. For commodities like crude oil on MCX, contango is common during periods of oversupply, while backwardation often signals tight near-term availability.

For inter-commodity spreads, the calculation is different. There is no single theoretical formula equivalent to the cost-of-carry model because the two commodities have different supply-demand fundamentals. Instead, inter-commodity spread values are driven by relative supply and demand factors, macro themes (risk appetite, industrial growth), seasonal patterns, currency movements (since many Indian commodity prices incorporate a USD-INR component), and historical mean-reversion tendencies.

The gold-to-silver ratio, for instance, has historically oscillated in a wide range. When economic conditions tighten and industrial demand weakens, silver often underperforms, pushing the ratio higher. When global manufacturing activity picks up and sentiment is bullish, silver can outperform gold significantly. Indian-specific factors also play a role: domestic festivals like Diwali and Akshaya Tritiya boost gold buying, which can temporarily influence domestic gold futures relative to silver.

For crude-oil-to-natural-gas spreads on MCX, Indian-specific demand patterns matter. India's LNG import volumes, government policies on domestic gas pricing, and the seasonal demand from the fertiliser sector (which uses natural gas as a feedstock) can all move natural gas prices in ways that do not directly impact crude oil, creating temporary dislocations in the spread.

It is also worth noting the role of the rupee-dollar exchange rate. MCX commodity prices are derived partly from international prices (which are quoted in USD) and partly from the INR/USD exchange rate. If the rupee depreciates sharply, both gold and silver prices in INR tend to rise together, which means the absolute spread in rupee terms widens even if the USD-denominated ratio is unchanged. Traders who overlook this currency dimension can misread spread signals. To isolate the pure commodity spread, some sophisticated traders track the spread in USD terms (using international benchmarks) alongside the MCX INR-denominated spread.

Margin Benefits and Exchange Recognition of Spreads

One of the most practically significant features of spread trading - and one that makes it attractive to retail participants - is the potential for reduced margin requirements on recognised spread positions. When an exchange formally recognises that two positions offset each other to a significant degree, it may allow the trader to post less margin than would be required for two separate outright positions.

On MCX, the exchange has provisions for calendar spread margins. For recognised calendar spread combinations in the same commodity, the required margin is typically lower than the sum of the margins for the two individual legs, because the offsetting nature of the positions reduces the net risk to the clearing corporation. The exact spread margin rates are published by MCX and can be revised by the exchange in response to market volatility or regulatory direction from SEBI. Traders should always check the current margin circular from MCX or their broker before entering a spread position.

The margin benefit can be substantial. For example, if the outright margin for a near-month crude oil contract is ₹1,20,000 and the outright margin for a far-month crude oil contract is also ₹1,20,000, the total outright margin requirement for both legs individually would be ₹2,40,000. However, if MCX recognises this as a calendar spread and applies a spread margin of, say, ₹60,000 for the combined position, the trader needs to post significantly less capital, improving capital efficiency.

However, margin benefits come with important caveats. First, the recognition of a spread position is typically automatic only if both legs are placed as part of a spread order through a system that links them together. If the two legs are placed independently as outright orders, the exchange may not automatically grant the spread margin benefit, and the broker will hold the full outright margin for each leg. Second, as expiry approaches and one leg nears delivery, the exchange may increase margins or withdraw the spread benefit on the expiring leg, which can result in sudden higher margin requirements - a phenomenon sometimes called margin step-up at expiry.

For inter-commodity spreads, formal exchange recognition and margin benefits are less common in Indian markets compared to calendar spreads. The two commodities in an inter-commodity spread have genuinely independent price risks, so the clearing corporation has less justification for reducing margins. In practice, traders holding inter-commodity spread positions on MCX usually need to post the full outright margin for each leg independently. This makes inter-commodity spreads more capital-intensive than calendar spreads, even though the overall market risk of the combined position may be lower than two uncorrelated outright positions.

From a regulatory standpoint, SEBI oversees the commodity derivatives market in India through its regulatory framework, and it has the authority to mandate margin revisions across all exchanges during periods of extreme volatility. Traders should be aware that SEBI can direct MCX or NCDEX to increase margins sharply - even on spread positions - during crisis periods. Maintaining a margin buffer above the minimum requirement is prudent practice and not merely a textbook suggestion.

Finally, it is worth mentioning that the margin framework for commodity spreads in India has evolved considerably since SEBI took over commodity market regulation in 2015 (previously under the Forward Markets Commission). As the Indian market matures and participation from institutional players grows, the margining methodology for spread positions is likely to become more sophisticated over time, potentially introducing SPAN-based portfolio margining that formally recognises inter-commodity correlations.

The Role of Contango and Backwardation in Calendar Spread Strategy

Any trader who wishes to use calendar spreads seriously must develop a thorough understanding of contango and backwardation - the two structural states that a futures market can occupy - because they determine both the starting value of the spread and the likely direction of its evolution over time.

Contango describes a market where prices for future delivery are higher than prices for immediate (spot or near-month) delivery. This is the normal state for storable commodities because it reflects the cost of carry: a seller who holds physical inventory must be compensated for the cost of storage, financing, and insurance from now until the delivery date. In a contango market, as the near-month contract approaches expiry and eventually becomes the spot contract, its price typically converges toward the spot price from above, which means the near-month price rises relative to the far-month price, causing the calendar spread (long far-month, short near-month) to narrow over time. This is often described as the spread "rolling down" the contango curve.

For a trader who is long a calendar spread (long the far-month, short the near-month) in a stable contango environment, time works against the position because the spread naturally narrows as the near-month converges to spot. This trader needs a change in fundamentals - perhaps growing supply shortages in the near term - to cause the spread to widen against the contango trend.

Backwardation describes the opposite condition: near-month prices exceed far-month prices. This typically occurs when immediate demand for the physical commodity is very strong and inventories are tight. In backwardation, a calendar spread (long far-month, short near-month) starts at a negative value and the spread is said to be inverted. For a trader who is long this spread, profit comes if the backwardation eases - that is, if near-term supply pressure reduces and the market moves back toward contango.

In Indian commodity markets, crude oil frequently oscillates between contango and backwardation based on global inventory cycles and OPEC+ production decisions. Natural gas shows strong seasonal backwardation during the winter months in the Northern Hemisphere, as near-month contracts capture heating demand premiums. Gold typically trades in contango reflecting its low storage cost and well-developed leasing market, though the contango is usually modest relative to energy commodities.

Agricultural commodities on NCDEX present a more complex picture because their calendar spreads are driven by seasonal crop cycles rather than continuous storage costs. For example, the spread between the pre-harvest and post-harvest soybean contracts on NCDEX can move dramatically as weather data updates crop yield expectations. A trader who correctly anticipates a drought-reduced harvest might buy the near-month contract (expecting tight pre-harvest supply) and sell the far-month contract (expecting ample post-harvest supply once the new crop arrives), profiting if the spread widens in backwardation.

The transition between contango and backwardation can be rapid and is often driven by inventory data releases, weather events, geopolitical developments, or policy announcements. Traders using calendar spreads must monitor these fundamental drivers continuously. The Indian Meteorological Department's monsoon forecasts, the Ministry of Agriculture's crop production estimates, and global inventory reports (such as the EIA weekly petroleum status report for crude) are all key data inputs for spread traders.

One nuance that many beginners overlook: the shape of the entire futures curve - not just the spread between two specific months - conveys market information. A steeply upward-sloping contango curve signals that the market expects current oversupply to persist for some time. A flat or gently contango curve suggests the market sees conditions gradually normalising. A steeply backwardated curve signals intense near-term supply stress. Spread traders who read the full curve rather than just a single month-pair gain a richer picture of market expectations.

Tax Treatment of Commodity Spreads in India

Understanding the tax treatment of profits and losses from commodity spread trading is an important but often overlooked aspect of building a complete spread trading strategy. While detailed tax advice should always be obtained from a qualified chartered accountant or tax professional, this section outlines the general framework as it applies to commodity derivative gains and losses in India.

Under Indian tax law, gains and losses from commodity futures trading - including spread positions - are generally classified as business income or speculative income, depending on the nature of the trading activity and whether delivery is taken. Retail traders who trade commodity futures without taking physical delivery typically have their gains treated as non-speculative business income if the contracts are settled through recognised stock exchanges or recognised commodity exchanges, because exchange-traded commodity derivatives are excluded from the speculative transaction definition under Section 43(5) of the Income Tax Act (with certain exceptions for agricultural commodities). However, the precise classification can depend on individual circumstances, and the law can change with each Finance Act - so always refer to the latest Finance Act and consult a tax professional for your specific situation.

For spread positions where both legs are closed within the same settlement, the net profit or loss is straightforward to compute: it is simply the gain or loss on the long leg plus the gain or loss on the short leg. However, where the two legs straddle a financial year end - which is relevant for calendar spreads that span March 31 - the mark-to-market valuation of the open leg at year-end may create a timing difference in tax recognition that requires careful accounting.

Commodities Transaction Tax (CTT) is levied on non-agricultural commodity derivatives traded on recognised commodity exchanges in India. CTT is charged on the seller side of each transaction. Because a calendar spread involves both a buy and a sell leg, CTT is payable on the sell leg of the spread. The applicable CTT rates should be checked from the latest Finance Act or official government notifications, as they are subject to revision.

GST on brokerage and other charges paid to the broker is also applicable to commodity transactions, and this cost should be factored into the overall profitability calculation for spread strategies. For high-frequency spread traders, these transaction costs - brokerage, CTT, exchange transaction charges, and GST - can accumulate significantly and erode the profit potential of narrow-margin spread strategies.

For agricultural commodity futures traded on NCDEX, the tax treatment has had some nuances historically - again, the specific rules should be verified with reference to the current Finance Act and a qualified professional. Agricultural commodity options and futures have had different regulatory and tax treatment from non-agricultural commodity derivatives at various points in Indian market history.

One important practical point: commodity derivative gains are generally subject to tax audit requirements if the turnover exceeds the threshold specified under the Income Tax Act. The turnover calculation for futures trading uses a specific methodology (based on absolute profit/loss, not contract value), and traders should understand this calculation to determine whether they cross the tax audit threshold. A chartered accountant familiar with derivative taxation can assist with this.

Practical Implementation: How to Enter and Monitor a Spread Position

Moving from theory to practice, this section walks through the practical mechanics of entering, monitoring, and exiting a commodity spread position in the Indian market context.

The first step is identifying a spread opportunity. For a calendar spread, this typically involves charting the historical price differential between two delivery months of the same commodity and identifying when the current spread deviates significantly from its historical range. Many commodity trading platforms and charting tools allow you to plot spread charts, which show the difference in prices between two futures contracts over time. If, for instance, the MCX August crude oil contract is trading at a ₹500-per-barrel premium to the June crude oil contract, but historically this two-month spread has averaged ₹200, a trader might hypothesise that the spread is unusually wide and will revert - leading to a short calendar spread (sell August, buy June).

For an inter-commodity spread, the first step is identifying the price ratio or differential between the two commodities and assessing whether it is at a historically extreme level. Plotting the gold-to-silver ratio over a five-year period using MCX closing prices, for example, can reveal periods when silver appears relatively overpriced or underpriced relative to gold.

Once the opportunity is identified, the trader must size the position correctly. For calendar spreads, sizing is relatively straightforward because both legs involve the same commodity and the same contract size. For inter-commodity spreads, the trader must calculate the appropriate hedge ratio. The simplest approach is to equalise the monetary value of each leg: divide the price of the more expensive commodity by the price of the less expensive commodity to determine how many lots of the cheaper commodity are needed per lot of the more expensive commodity. For example, if one lot of gold futures is worth ₹50 lakhs and one lot of silver futures is worth ₹10 lakhs, the trader would need to hold five lots of silver for every one lot of gold to create a roughly dollar-neutral position.

With the sizing determined, the trader should check margin requirements for both legs with the broker. If the exchange offers a spread margin benefit, confirm how to ensure the position qualifies for that benefit (through a spread order rather than two separate outright orders, if required). Ensure that sufficient funds are available not just for the initial margin but also for potential mark-to-market losses and margin step-ups.

After the position is entered, active monitoring is essential. Unlike outright positions where a single price feed is the primary concern, spread traders must monitor both legs simultaneously and track the spread value directly. Setting up alerts for when the spread reaches target levels (profit target) or adverse levels (stop-loss trigger) is good practice. Most professional commodity trading platforms allow traders to create custom spread watchlists.

For calendar spreads, the trader must also track the days remaining to expiry of the near-month contract and plan the exit or rollover well before the last trading date. On MCX, the last trading day for a futures contract is typically the last calendar day of the contract month that falls on a trading day, though this can vary by commodity - always verify the specific contract specification on the MCX website. Attempting to exit a near-month position in the final day or two of trading can be expensive due to thin liquidity.

Finally, keep detailed records of every spread position: entry date, both leg prices, spread value at entry, exit date, both leg exit prices, spread value at exit, and all transaction costs. This record-keeping serves both for tax filing purposes and for your own ongoing assessment of spread strategy performance.

Spreads in Agricultural Commodities: Special Considerations on NCDEX

Agricultural commodity spreads, primarily traded on the National Commodity and Derivatives Exchange (NCDEX), have a character quite different from the energy and metals spreads on MCX. Understanding these differences is essential for anyone looking to apply spread strategies to agri commodities.

The fundamental driver of agricultural calendar spreads is seasonality. Unlike crude oil or gold, which can be stored for extended periods at relatively stable costs, agricultural commodities are subject to crop cycles, harvest seasons, and perishability. A commodity like chana (chickpeas) has a winter crop that arrives in March-April. Before the harvest, if supplies are tight, near-month contract prices can be significantly elevated relative to post-harvest month contracts. After the harvest, prices typically moderate as new supply floods the market. A trader who correctly anticipates this seasonal pattern might sell near-month chana contracts (expecting prices to fall as harvest approaches) and buy far-month contracts (expecting prices to stabilise post-harvest supply glut), profiting if the inverted spread compresses.

Monsoon is perhaps the single most important variable for Indian agri commodity spreads. The Indian Meteorological Department's monsoon forecast, the progression of the monsoon across different regions, and the final rainfall data all directly impact the supply outlook for kharif crops (sown in June-July, harvested September-October) like soybean, cotton, and mentha oil. A below-normal monsoon forecast can cause near-month agri contracts to surge as markets price in supply shortfalls, widening spreads in backwardation. Above-normal rainfall, conversely, can flatten or reverse the spread.

Government policy is another major wild card in agricultural commodity spreads. India's government actively intervenes in agricultural markets through mechanisms like Minimum Support Prices (MSP), export restrictions, import duty changes, and stock limits under the Essential Commodities Act. These interventions can move prices dramatically and in ways that are difficult to predict based on supply-demand fundamentals alone. A surprise export ban on a commodity can cause domestic prices to crash, impacting near-month contracts far more than far-month contracts. Agri spread traders must closely monitor government policy announcements.

Liquidity in NCDEX agri futures can be patchy. Some contracts - like soybean, chana, and castor seed - have reasonable liquidity in the near-month contract but very thin volumes in the far-month contracts. This makes entering a calendar spread in far-month agri contracts challenging and potentially costly due to wide bid-ask spreads. Traders should assess open interest data before attempting spreads in the far months of agricultural contracts.

For inter-commodity spreads within agri markets, the soybean crush spread (buying soybean and selling soybean oil and soybean meal in appropriate proportions) is conceptually important but practically challenging for retail participants because it requires coordination across three separate contracts with different lot sizes and liquidity profiles. While large processors and exporters use the crush spread as a genuine hedging tool, retail traders typically find it complex to implement effectively.

Finally, physical delivery norms for agricultural commodities can be more complex than for metals or energy. Some NCDEX contracts result in compulsory delivery if held to expiry, and the specifications for deliverable grades, delivery locations, and the condition of the commodity are detailed and must be understood. Retail spread traders in agri commodities should almost always close their positions well before expiry rather than risk entering the delivery process.

Spread Trading as a Hedging Tool for Commercial Participants

While much of this article has focused on spread trading from a speculative perspective, it is important to recognise that for many commercial participants - farmers, processors, exporters, importers, and manufacturers - commodity spreads serve a genuine hedging function that reduces business risk rather than seeking speculative profit.

Consider a cooking oil manufacturer in India who buys raw mustard seed from farmers and processes it into mustard oil. This processor faces a margin squeeze whenever mustard seed prices rise (increasing input costs) without a corresponding rise in mustard oil prices. By buying mustard seed futures on NCDEX and selling mustard oil futures, the processor creates a synthetic crush spread position that locks in a processing margin. If mustard seed prices rise and squeeze the margin, the gain on the long seed futures position compensates for the higher input costs. This is a classic use of inter-commodity spreads for commercial hedging.

Similarly, a petroleum product distributor in India who buys crude oil (through import contracts linked to international benchmarks) and sells refined products can use the crude-to-product spread - known in global markets as the crack spread - to hedge refining margins. While India's domestic fuel prices are regulated and the market structure differs from globally liberalised markets, the principle of using commodity spreads to lock in processing margins is widely applicable.

For farmers, calendar spreads can help manage the price risk between planting and harvest. A soybean farmer who plants in June knows that the crop will be ready for sale in October. By selling the October soybean futures contract on NCDEX at planting time and buying it back at harvest, the farmer locks in a selling price. If the farmer also needs to purchase inputs (fertiliser, seeds) that are priced with reference to futures contracts, managing the spread between input and output prices through futures is a form of inter-commodity hedging.

Exporters and importers face a different kind of spread risk: the currency spread. An exporter of agricultural commodities who has entered a contract to deliver goods priced in USD faces a risk that the USD/INR exchange rate will move adversely between the contract date and the delivery date. While currency hedging through USD/INR futures on NSE or BSE is the direct tool for this risk, commodity calendar spreads can sometimes be combined with currency hedges to create more comprehensive risk management programs.

SEBI's regulatory framework for commodity derivatives recognises the importance of commercial hedgers and provides for separate position limits for hedgers versus speculators. Entities that can demonstrate genuine hedging need can apply for higher position limits from the exchange, allowing them to hedge larger commercial exposures. This regulatory accommodation underscores the legitimacy and importance of spread-based hedging in the Indian commodity market ecosystem.

For retail traders who aspire to use spread strategies primarily for speculative purposes, studying how commercial hedgers use spreads provides valuable insight into the fundamental economic relationships that drive spread values. When commercial processors are aggressively buying a crush spread, it typically signals that processing margins have fallen to levels where processors see genuine value - a signal that might interest speculative spread traders as well.

Example

Key benefits

How it works

1. 1
   Identify the Spread Opportunity

   Analyse historical price differentials between two related contracts - either two delivery months of the same commodity for a calendar spread, or two economically linked commodities for an inter-commodity spread - and assess whether the current spread is significantly above or below its historical average.

2. 2
   Form a Directional View on the Spread

   Decide whether you expect the spread to widen or narrow, based on your analysis of the cost of carry, supply-demand fundamentals, seasonal factors, and any relevant macro or policy developments in the Indian or global context.

3. 3
   Calculate the Correct Position Size and Hedge Ratio

   For calendar spreads, typically one lot of each leg is sufficient. For inter-commodity spreads, calculate how many lots of each commodity are needed to equalise the monetary exposure of both legs and create a balanced spread position.

4. 4
   Check Margin Requirements and Fund Your Account

   Verify current margin requirements with your broker for both legs of the spread, confirm whether the exchange offers a reduced spread margin benefit, and ensure your trading account has sufficient funds for the initial margin plus a buffer for mark-to-market movements.

5. 5
   Execute Both Legs of the Spread

   Place the spread order - ideally using a linked spread order facility if available - so that both legs are executed simultaneously at prices that reflect your target entry spread; monitor the actual entry spread value to confirm the position is correctly entered.

6. 6
   Monitor the Spread Value and Key Drivers

   Track the spread value (not just individual leg prices) daily, and monitor the fundamental drivers that should cause the spread to move toward your target - including inventory data, seasonal developments, currency movements, and government policy announcements.

7. 7
   Exit or Roll the Position Before Expiry

   Close both legs simultaneously when the spread reaches your profit target or stop-loss level; for calendar spreads specifically, ensure both legs are closed well before the near-month contract's last trading date to avoid expiry and delivery complications.

Formula

Calendar Spread Value = Far-Month Futures Price − Near-Month Futures Price
Gold-to-Silver Ratio = Price per gram of Gold (MCX) ÷ Price per gram of Silver (MCX)

Key takeaways

Frequently asked questions

Related terms