Indices DJIA S&P 500 DAX 30 Nasdaq 100 Nasdaq Comp Nikkei 225 FTSE 100 SMI DJ Stoxx 50 CAC 40 Hang Seng Kospi Nyse Comp AMEX   -     -     -     -     -     -     -     -     -     -     -     -     -     -   10911 1137.4 5732.4 2127.7 2438.1 8981.9 5072.1 4984.1 2161.9 5732.4 19614.7 1817.4 7017.6 2174.7 Commodites Light Crude Oil Brent Crude Copper Gold Pallad Platinum Silver Dow Diamonds QQQQ   -     -     -     -     -     -     -     -     -   83.08 106.28 1.17 1758.7 730.5 1782 38.21 109.16 55.42 Last update: 11-08-2011 14:29:00 (GMT - Live)

Spread Trades Introduction Example 1 - Crude Oil Producer's Short Hedge Example 2 - Electricity Producer Fears a Price Decline Example 3 - Petroleum Marketer's Long Hedge, Rising and Falling Markets Strip Trades Spread Trades Spread positions offer another way of using futures. There are many types of spreads, but they all have two things in common. First, a spread always involves at least two futures positions, which are maintained simultaneously. For example, a trader may be long 10 June electricity contracts and short 10 September electricity contracts. Second, the price changes in the two or more legs of the position are expected to have a reasonably predictable relationship, and the potential profitability of the spread lies in that relationship or expected changes to that relationship. For example, the trader who is long 10 June contracts (the near-term contract) and short 10 September contracts (the distant contract) will benefit if market forces cause the near-term contract to make a larger advance than the more distant contract – or if market forces cause the distant contract to drop more sharply than the near-term contract. Crack Spreads A petroleum refiner, like most manufacturers, is caught between two markets: the raw materials he has to purchase and the finished products he offers for sale. It is the nature of these markets for prices to be independently subject to variables of supply, demand, transportation, and other factors. This can put refiners at enormous risk when crude oil prices rise while refined product prices stay static or even decline, thus narrowing the spread. The Exchange facilitates crack spread trading by treating them as a single transaction for the purpose of determining a market participant’s margin requirement. To calculate the theoretical refining margin, first calculate the combined value of gasoline and heating oil, then compare the combined value to the price of crude. Since crude oil is quoted in dollars per barrel and the products are quoted in cents per gallon, heating oil and gasoline prices must be converted to dollars per barrel by multiplying the cents per gallon price by 42 (there are 42 gallons in a barrel). If the combined value of the products is higher than the price of the crude, the gross cracking margin is positive. Conversely, if the combined value of the products is less than that of crude, then the cracking margin is negative. Using a ratio of two crude oil contracts to one gasoline contract plus one heating oil contract, the gross cracking margin is calculated as follows: (Assume heating oil is $0.5450 per gallon, gasoline is $0.5750 per gallon and crude is $18.50 per barrel.) $0.5450 per gallon x 42 = $22.89 per barrel of heating oil $0.5750 per gallon x 42 = $24.15 per barrel of gasoline The sum of the products is: $47.04 Two barrels of crude ($18.50 x 2) = $37.00 Therefore, $47.04 - $37.00= $10.04 $10.04/2 = $5.02 (margin) A refiner expects crude prices to hold steady, or rise somewhat, while products will fall. In this case, the refiner would "sell the crack"; that is, he would buy crude oil futures and sell gasoline and heating oil futures. Conversely, buying the crack means buying gasoline and heating oil and selling crude oil. Whether a hedger is selling the crack or buying the crack reflects what is done on the product side of the spread. Once the hedge is in place, the refiner need not worry about movements in absolute futures prices. He need be concerned only with how the combined value of products moves in relation to the price of crude oil. The following example shows a refiner locking in a margin between crude oil and heating oil. Source: