NISM Series XVI - Commodity Derivatives Exam Notes
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Spread refers to the difference in prices of two futures contracts. When actual spread between two futures contracts of the same commodity widens, trader buys the near-month contract because it is under-priced and sells the far-month contract because it is overpriced.
When actual spread between two futures contracts of the same commodity narrows, trader sells the near-month contract because it is overpriced and buys far-month contract because it is under-priced.
Buying a spread is an intra-commodity spread strategy. It means buying a near-month contract and simultaneously selling a far-month contract.
Selling a spread is also an intra-commodity spread strategy. It means selling a near-month contract and simultaneously buying a far-month contract. This strategy is adopted when the near-month contract is overpriced, or the far-month contract is under-priced.
An inter commodity spread is made up of a long position in one commodity and a short position in a different but economically related commodity
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