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Sizing Up (and Breaking Down) a Futures Calendar Spread

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October 1, 2013

A futures calendar spread has a pretty intimidating name. But the spread is pretty straightforward when broken down one word at a time. You may know that an options calendar spread contains two options contracts on the same underlying with different expirations. So, a futures calendar spread is a trade of two futures contracts on the same product with different expirations—one long (bought) and one short (sold).

Listed vs. Composite Spreads

Futures markets are much like second cousins you meet at a family reunion—good people, but a little, shall we say, different. This is particularly true for the futures spread market.

As with an options calendar, you can enter a futures calendar as a single trade, or you can “leg” into it one side at a time. With futures however, there are different quotes for each method—the composite and the listed quote. The composite is the current ask of the long contract, minus the current bid for the short contract. And like anything else, you can get the composite manually in thinkorswim® by entering one symbol minus the other in any symbol entry box.

With futures, though, there’s also a symbol and quote for listed calendar spreads that are entirely separate from the composite, and there are specific markets for trading these calendars that exist independently of individual futures markets. Most importantly, these markets take only spread orders, and quote only those spreads. But the deliverables are the same. And the quote is written the same as the composite quote, but has an “=” preceding it. (See Figure 1.)

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FIGURE 1: FUTURES CALENDARS ON THINKORSWIM. For illustrative purposes only. Not a recommendation of a specific investment or investment strategy.

Lock It Up

The easiest way to understand futures calendars is to see them for yourself in thinkorswim.

1. From the “All Products” screen on the Trade Page, enter a future in the symbol entry field

2. At the futures dropdown, select “ALL” for active contract and set the spread to “Calendar.”

3. Click the arrow next to your pre contract to view all of the listed spreads that include the symbol.

Futures-pairs trading provides you with the opportunity to trade based on the relationship between two securities, not trend. While it’s always possible for a correlation to break down longer than capital would permit, you may find pairs trading to be a refreshing approach to trading the markets—particularly when you can’t tell where the market is going.

This might seem like more trouble than it’s worth. But the listed spread market generally has a smaller bid/ask spread than composite, and often has a smaller minimum tick increment as well. The magnitude of the difference varies, but can be half the width of the composite or less, in some cases. Since the overall market is narrower, that is a potential savings to you regardless of your trade’s size.

The listed calendar also takes less buying power. When a calendar is routed as a single trade, the requirement includes the spread margin relief at the time the order is routed. If trading the legs in separate orders, that margin relief isn’t applied until both orders have filled. Whether you’re a cutting-edge scalper or humble long-term hedger, there’s no reason to leave money on the table.

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