A futures spread is an arbitrage strategy in which a trader completes a unit trade with both a long and short position — which offset each other — in order to take advantage of price discrepancies. It is primarily used to profit from price volatility and hedge against systematic risk.
In order to execute a futures spread trade, a trader must take two simultaneous positions. The positions must have different expiration dates, as the goal is to profit from the change in price. The two positions — which are called “legs” — are traded at the same time.
Inter-commodity vs. intra-commodity
There are two types of futures spreads:
- Inter-commodity
- Intra-commodity
Inter-commodity futures spreads involve separate-but-related commodities — or, in our case, cryptocurrencies — with the same contract month. If a trader expects the price of ETH to increase more than the price of BTC, they might purchase ETH futures and sell BTC futures. If successful, profit would be generated if the price of ETH increases more than the price of BTC.
Intra-commodity futures spreads — also called intra-commodity calendar spreads — involve the same crypto asset (in our case). However, both legs of the trade must involve different months. For example, a trader could purchase a May BTC futures contract while selling a November BTC futures contract. The same could be done in reverse, as well.
Futures spreads are relatively conservative strategies that feature relatively low margins. Severe market volatility would generally affect both offsetting legs equally — making futures spreads a widely used hedge against systematic risk.
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Source: https://www.okx.com/academy/en/futures-spread