Profitability of Futures Calendar Spread Trading

Futures spread trading is a type of trading in which two different futures contracts are bought and sold at the same time, with the aim of profiting from the price difference between the two contracts. If the futures contracts are on the same underlying asset, then the spread is referred to as an intra-commodity, or calendar, spread. If the futures contracts are on two different underlying assets, then the spread is referred to as an inter-commodity spread. Futures spread trading can be a complex and risky strategy, so it is important to understand all the risks and rewards before entering into any spread trade.

Reference [1] examined the profitability of futures calendar spread trading by studying the calendar spread time-series momentum (STSM),

With more than 30 years of data, we investigate STSM in 22 US commodity futures markets. First, we assess whether past spread returns can predict future returns, a necessary condition for the existence of momentum. We find predictability to be very weak after correcting for the issues affecting prior research. Second, we implement STSM-based investment strategies. We compare STSM profits for individual markets and portfolios to profits generated by a simple long-only benchmark strategy that does not require any predictability. STSM does not generate returns statistically different from the benchmark trading strategy, with both strategies generating very low or negative returns. For the momentum to outperform the benchmark strategy, predictability should be three times larger than observed from real data, but would entail substantial downside risk. In sum, the empirical evidence indicates that returns from STSM-type strategies are illusive for the commodities and period studied. Our results strongly suggest that inclusion of unrealisable roll yield generates the illusion of profitable STSM trading strategies in previous research.

In short, futures calendar spread trading is not profitable for the commodities and period studied.

We have little experience with futures calendar spread trading, but we believe that for underlying assets that exhibit the mean-reverting property, e.g. the VIX futures, a profitable spread trading strategy can be developed.

Do you have experience with futures spread trading? Let us know in the comments below.


[1]  Quanbiao Shang, Teresa Serra, and Philip Garcia, Ride the trend: Is there spread momentum profit in the US commodity markets?, J Agric Econ. 2022; 00:1–24.

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