3.4.1. Intramarket Spreads
A trader who expects either the spot market price or the carrying cost of an underlying instrument to change might use an intramarket spread. In both cases, such a change will impact the price of a futures contract that expires in the near-term differently than one with a more distant expiration date.
We know, for example, that a disruption in the cash price impacts the futures market most sharply in the nearest periods because of convergence in the contract month. Price volatility generally diminishes over time as the long-term impacts of a disruption are less certain. As to the cost of carry, the impact of a change in these expenses increases over time, as each month’s cost increase is added to the last.
Example: In December 2017 a trader believes that storage costs on the wheat contract are about to increase its cost of carry. Seeing an opportunity, she shorts the March 2017 contract at 420’0 and goes long the September 2017 contract at 425’0. Storage costs do indeed increase, and in February the trader offsets the March contract at 460’0 and the September contract at 490’0.
|
December 2016 |
February 2017 |
Gain/Loss |
|||
|
Mar ’18 |
Short |
+420’0 |
Long |
-460’0 |
-40’0 |
|
Sep ’18 |
Long |
-425’0 |
Short |
+490’0 |
+65’0 |
|
Spread |
-5’0 |
+30’0 |
+25’0 |
||
Because the additional cost of carry has a greater impact on the September contract than the near-term March contract, this intramarket spread made