Common Types of Spreads

The whole unit on one sheet: the three named spread types, and which leg is long and short in each.

What Is a Carrying Charge Spread?

• A carrying charge spread is long one delivery month and short another of the same commodity, also called intra-market, intra-commodity, inter-delivery, or calendar spread. Example: long May corn and short July corn.
• In a normal market, the deferred month trades above the nearby by roughly the cost of carry: storage, insurance, and interest.
• The gap has a ceiling but no floor. At full carry, arbitrage (buy the cheap nearby, store it, deliver against the deferred) caps how far the deferred's premium widens. There is no floor: tight nearby supply can push the nearby over the deferred without limit, flipping into an inverted market.

Which Leg Is Long in a Bull Spread Versus a Bear Spread?

• Bull and bear are directional labels on a carrying charge spread: same commodity, two delivery months. These leg assignments never flip.
• Bull spread: long the nearby, short the deferred. Profits when the gap narrows, the nearby gaining on the deferred (a bull expects the nearby to strengthen).
• Bear spread: short the nearby, long the deferred. Profits when the gap widens, the nearby weakening relative to the deferred (a bear expects the nearby to weaken).
• The profit is the differential, not the flat price. A bull spread can profit in a falling market if the nearby falls less than the deferred.
• Not symmetric in upside: a bull spread's profit (narrowing or inverting) has no theoretical cap; a bear spread's profit (widening) is capped near full carry.
• Caveat: this assumes a storable physical commodity, where the nearby is the more responsive leg. Financial futures with no storage cost, such as stock-index futures, can behave in reverse.

What Is an Intermarket Spread, and How Does It Differ?

• An intermarket spread is long one commodity and short a different but related commodity (or the same commodity on two different exchanges), usually the same delivery month.
• The gap is driven by the economic relationship between the two products, such as supply, demand, or processing margins, not by cost of carry.
• Named examples: a soybean-corn or wheat-corn spread; the soybean crush (long soybeans, short soybean meal and soybean oil), trading the processing margin, with the reverse crush taking the opposite legs.
• A carrying charge spread is one commodity, two months, driven by cost of carry. An intermarket spread is two different commodities, usually one month, driven by the product-to-product relationship.

Which Gotchas Trip Students Up?

• A bull spread does not need the outright price to rise; it needs the nearby to gain on the deferred, even if the nearby falls, as long as it falls less.
• "Bull is long the nearby, bear is short the nearby" never flips. Swapping the legs reverses the whole trade.
• Bull and bear upside are not equally open-ended. Bull (narrowing or inverting) is uncapped; bear (widening) is capped near full carry.
• In a normal market, the deferred trades over the nearby, not the reverse; nearby over deferred is an inverted market.
• An intermarket spread is two different related commodities, usually one month, not two months of one commodity. Cost-of-carry reasoning is the wrong driver for a soybean-corn or crush spread.

One-Breath Recap

A carrying charge spread is long one delivery month and short another month of one commodity, priced in a normal market with the deferred over the nearby by roughly the cost of carry, a gap capped near full carry but with no floor once nearby supply tightens toward inversion; bull and bear are directional labels on that spread, with a bull spread always long the nearby, profiting when the gap narrows with no theoretical cap, and a bear spread always short the nearby, profiting when the gap widens up to about full carry, a rule built on physical commodities that can reverse for financial futures like stock-index contracts; an intermarket spread instead pairs two different but related commodities, usually one delivery month, with the gap driven by their economic relationship, such as the soybean crush, not storage cost.

Need more than the recap? Read the full Common Types of Spreads unit.