Bull and Bear Spreads

This section covers the two directional labels for a calendar spread and, most importantly, which leg is long in each. The leg assignments never flip, so lock them in before anything else.

The Physical-Commodity Model Behind These Labels

The bull and bear direction logic below is built on the storable physical commodity case: grains, energy, and metals, where the nearby month is the more responsive leg.

• When demand firms or nearby supply tightens, the nearby is the leg that moves faster, so it gains on the deferred and the gap narrows toward inversion.
• This is the model the exam heading "Bull and Bear Spreads" is built on, and it is the default to use unless a question flags a different kind of market. A caveat for markets that behave in reverse appears at the end of this section.

Bull Spread: Long Nearby, Short Deferred

A bull spread is long the nearby month and short the deferred month of the same commodity. It profits when the spread narrows: the nearby gains on the deferred, meaning the nearby rises faster, or falls slower, than the deferred.

• Since the nearby is the more responsive leg, the gap narrows when demand firms or nearby supply tightens and the market moves toward inversion.
• The name follows the expectation. A bull expects the nearby to get stronger, so a bull spread is long the nearby. Strength in the near leg pulls the two prices together, narrowing the gap.

Cause and effect for a bull spread:

• Nearby strengthens vs deferred → gap narrows → long nearby / short deferred profits

Exam Tip: Gotchas

• A bull spread does NOT need the outright (flat) price to rise. It needs the nearby to gain on the deferred, so the spread narrows. The nearby can even fall in absolute terms and the bull spread still wins, as long as the nearby falls less than the deferred. Reasoning "the market went up, so the bull spread paid" skips the real test: did the gap between the two months narrow?

Bear Spread: Short Nearby, Long Deferred

A bear spread is short the nearby month and long the deferred month of the same commodity. It profits when the spread widens: the nearby weakens relative to the deferred, meaning the deferred gains on the nearby.

• A widening gap pushes the market toward full carry. This is typical when nearby supply is ample and the deferred re-earns the full storage-plus-insurance-plus-interest premium.
• The name follows the expectation. A bear expects the nearby to get weaker, so a bear spread is short the nearby. Weakness in the near leg lets the gap widen back toward carry.

Cause and effect for a bear spread:

• Nearby weakens vs deferred → gap widens → short nearby / long deferred profits

Memory Aid: Bull is long the nearby; bear is short the nearby. Picture the bull charging out in front (the near month) and the bear hanging back (the deferred). Whichever animal you pick, you go long the leg it stands on and short the other. Swap the legs and the whole trade reverses.

The Profit Is the Differential, Not the Flat Price

Both spreads pay off on the relative move between the two months, not on whether the outright price of the commodity rose or fell.

• A bull spread can profit in a falling market if the nearby falls less than the deferred, and lose in a rising market if the nearby rises less than the deferred.
• A bear spread is the mirror image: it profits when the nearby weakens relative to the deferred, regardless of the outright direction.

Think of it this way: the flat price of the commodity is the tide, and it lifts or drops both legs together. What decides a calendar spread is which leg pulls ahead of the other. The bull backs the nearby to pull ahead; the bear backs the deferred to pull ahead. The tide can do whatever it likes.

The ceiling-and-floor asymmetry from the carrying charge section carries straight into the profit potential of these two spreads:

• A bear spread's profit comes from the gap widening, which is capped at about full carry, because arbitrage keeps the deferred from pricing much beyond storage plus insurance plus interest.
• A bull spread's profit comes from the gap narrowing or inverting, which has no theoretical cap, because the nearby can run to any premium over the deferred when supplies are short.

Exam Tip: Gotchas

• Do not mix up the legs. A bull spread is long the nearby and short the deferred (bet the near leg strengthens, gap narrows); a bear spread is short the nearby and long the deferred (bet the near leg weakens, gap widens). "Bull is long the nearby, bear is short the nearby" is worth memorizing cold, since swapping the legs reverses the whole trade.
• The two spreads are not symmetric in upside. A bull spread (gap narrowing/inverting) has no theoretical profit cap, while a bear spread (gap widening) is capped near full carry. A question that treats both directions as equally open-ended has it wrong.

Caveat: Financial Futures Can Behave in Reverse

The long-nearby-is-bullish logic assumes a storable physical commodity, where the nearby is the responsive leg. That assumption does not hold everywhere.

• Financial futures with no storage cost, such as stock-index futures, can behave in reverse. A rising market can widen the deferred's lead rather than narrow the gap, because there is no storage cost anchoring the relationship the way there is for a physical commodity.
• Practical rule: if a question is about a physical commodity carrying charge spread, use the model above. If it flags stock-index futures or another non-storable market, check which leg the question says moves faster before assigning the direction.

Exam Tip: Gotchas

• The "long nearby is bullish" rule is a physical-commodity rule, not a universal one. Stock-index and other non-storable futures can move the opposite way, so a blanket "bull spread means long the nearby" answer can be wrong when the question is about a financial future. Read what the question says the market is before applying the physical model.