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IN THIS SECTION:
Hedging | The Cash Futures Basis | Spreading | Intramarket Spreads | Intermarket Spreads
Intramarket Spreads
An intramarket spread, also called a time spread, comprises a long position in one contract month against a short position in another contract month in the same futures contract on the same exchange. An example would be long March Sugar #11 futures contract, the world benchmark contract for raw sugar trading vs. short July sugar futures on ICE Futures U.S. or short September soybean futures vs. long January soybean futures on the Chicago Board of Trade (CME Group).
Figure 5:
Carrying Charge or Contango Market
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Figure 6:
Inverted Market or Backwardation
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The spread, or difference, between the prices of various futures delivery months reflects supply, demand and carrying costs. Because carrying costs generally increase over time, in many futures markets the price of each succeeding delivery month is higher than that of the preceding delivery month. This is called a carrying-charge, or contango, market, as illustrated in Figure 5.
In contrast, in some futures markets the highest price is for the nearby or spot month, and each successive delivery month is priced lower than the preceding month, as depicted in Figure 6. This is called an inverted market, or one in backwardation. Inverted markets sometimes occur when demand for the cash commodity is strong relative to its current supply. Inverted markets also occur when the income from holding the cash position exceeds the costs of carrying the position--for example, a U.S. Treasury bond futures position when long-term interest rates (the underlying bonds' yield) exceed short-term rates (the cost of financing the cash bond portfolio).
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