What a calendar spread is
Define a calendar spread and understand why traders care about the difference between two contract months of the same asset.
Lesson path
Futures, Indices, and Commodities
Calendar Spreads and Basis
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Define a calendar spread and understand why traders care about the difference between two contract months of the same asset.
Two months, one trade
Every futures contract has an expiration month. Crude oil isn't just 'crude oil' — it's March crude, April crude, May crude, all the way out years. Each one trades separately, with its own price. A calendar spread is when you go long one month and short another month of the same asset, at the same time. You're holding two contracts: one bought, one sold. They cancel each other out for direction, and what's left is a bet on the gap between them.
Say March crude trades at 75 dollars and June crude trades at 76. The gap is one dollar — back-month higher than front-month. If a trader goes long the March contract and short the June, they don't care if both prices rise to 90 or fall to 60 together. They care whether that one-dollar gap widens to two or narrows to zero. If both contracts move the same amount, the spread P&L is unchanged. The directional risk has been mostly engineered out.
Two things matter. First, the same asset — you don't mix gold with oil. The legs have to be the same underlying so they move together. Second, different months — that's where the spread lives. Common pairs are front-month versus the next month out, or front-month versus a deferred month a quarter or a year ahead. The further apart the months, the more sensitive the spread is to longer-term supply assumptions.
Recap: a calendar spread is long one expiration month and short another of the same asset. The trade is on the gap between months, not the absolute price. We'll spend this chapter on what makes that gap widen or narrow — because the gap is the curve, and the curve is the signal.
Knowledge check
Answer before moving on.
1. What's the defining trade structure of a calendar spread?
2. Crude oil rallies 5 dollars on geopolitical news. Both the March and June contracts rise by exactly 5 dollars. What happens to a long-March / short-June calendar spread?
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