Intercommodity Spreads
Intercommodity
spreads are done to trade the relationship between
one market and another market which are usually
related to each other. These spreads are
often done based on the evaluation that one market
is underpriced relative to another market.
Some relationships between markets may not change greatly, such as the
NYSE and S&P5OO spread. Many of the stocks in the
S&P500 are also on the New York Stock Exchange, so
both markets tend to be highly correlated.
Some related markets vary more such as the interest rate futures. The
interest rate market generally moves in unison, but
shorter-term rates may change more or less than
longer-term rates. It is even possible that
short-term rates could go up and long-term rates go
down, and vice versa. Rates of the same maturity can
change with respect to each other depending on the
quality of the issue. Eurodollars and Treasury bills
of the same maturity might move inversely in unusual
economic situations.
Other types of spreads have only a limited relationship and are not
really true spreads in the sense of related
markets. There may be correlations in markets
over the long term, such as the gold and oil
market, but buying one market and selling the
other for a short-term trade in futures is more
an outright position in both markets.
Another type of intercommodity spread is the crack or crush spread. This
kind of spread is based on the relationship of
the raw material and its constituent products.
Crude oil is refined into heating oil and
gasoline, and this spread relationship is called
the crack spread. Soybeans are refined into meal
and oil, and this relationship is called the
crush spread.
Intercommodity Spreads
