Spread Strategies – Calendar & Inter-Commodity

1. Introduction

A Spread Strategy involves buying one contract and selling another related contract simultaneously. The goal is to profit from the widening or narrowing of the gap (spread) between the two prices, rather than the absolute movement of the market. It is a lower-risk strategy.

2. Types of Spread Strategies

A. Calendar Spread (Time Spread)

• Concept: Buying and Selling futures of the same asset but with different expiry months.
• Example:
  • Buy Nifty Feb Future @ 20,100.
  • Sell Nifty Mar Future @ 20,200.
• Goal: The trader bets that the price gap (100 points) will change. He is neutral on whether Nifty goes up or down.

B. Inter-Commodity Spread

• Concept: Buying and Selling futures of two different but related assets with the same expiry.
• Example:
  • Buy Gold Futures.
  • Sell Silver Futures.
• Goal: Betting that Gold will outperform Silver.

C. Inter-Market Spread

• Concept: Buying and Selling the same asset on two different exchanges.
• Example: Buy Gold on COMEX (USA) and Sell Gold on MCX (India).

3. Diagram: Payoff Logic

4. Exam Notes: Writing the Answer

Question: "What is a Spread Strategy? Explain Calendar Spread." (5 Marks)

Answering Structure:

1. Definition: "Simultaneous purchase and sale of two related contracts."
2. Safety: "It is a conservative strategy with lower risk and lower margin."
3. Calendar Spread: Define it as "Same Asset, Different Time". Give the Nifty Feb/Mar example.

5. Quiz Time! 🎯