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Academy Beginners Tutorial Article

Futures spread trading — how to profit from the futures spread on OKX

2022.06.17 Rick Delaney

Futures spread is a trading strategy that seeks to profit from the price difference between two futures contracts with the same underlying asset but different settlement dates. Futures spreads are formed when a trader takes opposite positions in the futures market at the same time — i.e., buying one futures contract and selling another. A futures spread trader’s profit comes from the price difference, or spread, between the two instruments. 

This article will explain what a futures spread is using examples and demonstrate how using the strategy might be advantageous. After moving on to address their risks, we conclude by describing how to trade futures spreads across the various products OKX offers. Let’s go! 

What is a futures spread? 

Futures spread trading is the simultaneous buying and selling of an equal quantity of two futures contracts that share the same underlying asset. The strategy is “market neutral,” meaning the underlying asset’s price direction does not influence its profitability. In other words, futures spread traders can profit when the market trends up or down, or remains flat over the terms of the traded contracts. 

If the underlying asset’s price increases ahead of the first contract’s settlement date, the long position makes money while the short position loses money. Meanwhile, if the underlying’s price declines, the short position makes money and the long position loses money. By taking equally sized positions simultaneously, the net gain or loss should be close to zero. 

Despite requiring that both a long and short position are taken, when talking about futures spreads, traders will often refer to “buying the futures spread” or “selling the futures spread.” Here, buying and selling refer to the first contract to settle — also known as the front-month or near-term contract. Therefore, if we were to buy a BTC futures spread, we might buy BTC/USDT July futures contact and sell the BTC/USDT September contract. If we were to sell the same spread, we would sell the near contract (BTC/USDT July) and buy the longer-term contract (BTC/USDT September).

Whether to buy or sell the spread will depend on the contracts’ prices when entering the trade. If the near-term price is lower than the longer-term contract, we want to buy the spread (i.e., buy the near-term contract and sell the longer-term one). When longer-term contracts are priced higher than near-term contracts, we say the market is in contango.  

We want to sell the spread if the longer-term contract is priced lower than the near-term. If the near-term futures contract is priced higher than the longer-term contract, we call this backwardation.

Contango occurs when the market is bullish about the future spot price of the underlying asset. Traders are willing to pay more for longer-term contracts because they believe the spot price will continue to rise, making even a more expensive futures contract an appealing prospect. The opposite is true for backwardation. In bearish markets, traders are more likely to sell longer-term futures in anticipation of declining spot prices. This puts downward pressure on futures contract prices.    

Although different types of futures spreads exist in traditional finance, the most common in cryptocurrency markets is the intramarket spread, also called a calendar spread. This simply means that the two contracts have different settlement dates but relate to the same underlying asset in the same market — for example, buying the BTC monthly and selling the BTC quarterly, or vice versa. 

Futures spreads in cryptocurrency can comprise a long and short futures contract taken simultaneously or a futures contract and a perpetual swap — which is a futures contract without a settlement date. 

The key characteristics of a futures spread trade are: 

  • Must comprise two positions and only two positions
  • Positions must share the same underlying asset
  • Legs must be opposite — i.e., long and short
  • The strategy is market neutral 
  • Futures contracts must have different settlement dates
  • Both legs of the spread must be an identical quantity
  • The trader profits from the price differential between the two contracts 

Futures spread example

To better illustrate futures spreads, let’s look at an example.

It’s January, and the BTC spot price is 20,000 USDT. The trader buys the March BTC future at 21,000 USDT and sells the April BTC future at 21,200 USDT. The spread is 200 USDT. 

The trader has a couple of options. Firstly, they can wait for both contracts to settle, profiting from the spread when they entered the trade. The trader would effectively buy BTC at 21,000 USDT in March and sell BTC a month later for 21,200 USDT. Regardless of the spot price at the time of settlement, they would profit 200 USDT. This option would make sense if the spread narrows or remains the same and their account has sufficient margin to keep the second leg open. 

Alternatively, they can close their positions for an even greater profit if the spread widens before settlement. Suppose the near-term contract price remains the same but the longer-term contract price increases to 22,000 USDT. When closing the position, they would profit an additional 800 USDT for a total of 1,000 USDT. This option is favored when the spread between near- and longer-term contracts has widened.  

Another option is to roll over the spread at the near-term contract settlement date. Here, the trader would close the near-term contract and take another futures position opposite the longer-term contract. This would keep the futures spread trade open with a new settlement date. 

Why trade a futures spread?

There are several reasons why a trader might want to deploy a futures spread strategy. Firstly, futures spreads are non-directional trades. The trader does not need to speculate on whether the underlying asset’s price will increase or decrease — they only care about the size of the spread. 

As a market-neutral strategy, spread trading also reduces the impact of price volatility in the underlying asset. An event causing a big shift in the underlying’s price should equally affect both legs of the trade. Such an event could result in significantly greater profits or losses when trading asset prices outright. 

Reduced margin requirements can also make spread trading attractive. When trading a futures spread, systemic risk is significantly reduced versus trading outright. As such, the trading platform may allow traders to take positions with less upfront margin. This is the case using OKX’s portfolio margin account mode.  

As a derivative-based strategy, the use of leverage can further reduce the upfront capital requirements when spread trading. However, leverage does carry its own set of risks discussed below.  

Spread trades can be used to hedge an outright position, locking in profit regardless of price at contract settlement. Additionally, a spread trade can be used as a speculative vehicle. By buying a spread — that is, trading the bull spread — the trader can speculate that the price of the longer-term contract will increase relative to the near-term contract. Conversely, selling a spread enables traders to speculate that the price of the longer-term contract will decrease relative to the near-term contract. 

Futures spread trading risks

Although spread trading mitigates many of the pitfalls associated with outright positions in a market, the strategy is not without its own risks. However, these risks can be minimized with careful management. 

Firstly, using leverage carries the risk of liquidation. When trading with leverage, it’s important to remember that both profits and losses are amplified. A spread position can automatically be partially or fully closed if you no longer satisfy a leveraged trade’s margin requirements. 

Execution risk is also a factor when deploying a futures spread. When attempting to place two trades simultaneously, it’s possible that only one leg fills and the other does not. Again, this exposes the trader to the same price volatility risk as an outright position, which is precisely what they were trying to avoid by using a spread trading strategy. 

OKX provides various tools to mitigate execution risk. For example, when placing a spread trade using our block trading platform’s predefined strategies, both legs execute simultaneously, or else neither leg executes. Therefore, it’s impossible to expose yourself to outright volatility risk by only entering one leg of the trade. 

Getting started with futures spreads on OKX

As mentioned, OKX provides various tools to get started with spread trading and to further mitigate risk. We’ll also be adding more features to simplify spread trading over the coming weeks and months, and will update this tutorial accordingly. 

Of course, you can enter spread trades manually by taking opposite positions in the futures market, or the futures and perpetual swap market. However, this opens up traders to execution risk, which might discourage attempting to execute the strategy manually.  

Block trading

OKX’s block trading platform offers several predefined strategies to deploy multi-leg trades quickly and without execution risk. 

You can learn how to deploy simple block trades in this dedicated guide. The process for entering spread trades via the platform is very similar. 

From the RFQ Builder, select the underlying asset you want to trade from the “Pre-defined Strategies” section. Then, click Futures Spread

You will see two trade legs appear in the RFQ Builder. First, select each leg’s expiry date. Then, enter the amount you want to trade. You can also change whether the leg is a buy or sell using the green B and red S buttons, and if the legs are coin-margined or USDT-margined under “Type.” 

In the above example, we request quotes for the BTCUSDT 220708 Future and the BTCUSDT 221230 Future. 

Next, select the desired trade counterparties from which you want to receive quotes. 

When you’ve entered and checked your spread trade parameters, click Send RFQ.  

On the RFQ Board, you’ll see quotations from your chosen counterparties under the “Bid” and “Ask” columns. The figures displayed are price differences for buying and selling your chosen instruments’ spread. You’ll also see the creation time, the time remaining before your quotes expire, the position’s status and quantity, and the counterparty making the quote. 

Click Buy to buy the spread (i.e., long the near contract and short the far contract), or Sell to sell the spread (i.e., short the near contract and long the far contract). 

Check all the details again on the trade confirmation pop-up before clicking Confirm Buy or Confirm Sell. If you want to edit any details, click Cancel.

You will then see your open position appear in the “History” section at the bottom of the RFQ Board. Executed trades will remain there for seven days. To view older positions, click view more

Your trade legs will also appear as positions in the trade history section of “Margin Trading.” Here you can close either position with either a limit or market order.

Profit from futures spreads on OKX

OKX constantly strives to give users maximum choice and flexibility when developing and deploying trading strategies. As part of this mission, we’re rolling out various tools to help traders take advantage of more complex multi-leg trading strategies, such as futures spreads. 

Futures spread trading helps mitigate the risk of taking outright positions in the often volatile cryptocurrency markets. When using OKX’s portfolio margin account mode, trading the spread also reduces overall margin requirements, making it an attractive option for high-net-worth users, institutions and market makers. We currently only support automated futures spread trading on our powerful block trading platform, but look out for the strategy being incorporated into our other products in the coming weeks and months. Game on! 

Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.

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