How to make gains from futures spread

Futures spread is a trading strategy that seeks to earn growth from the price difference between two expiry futures 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 gains 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 involves purchasing and selling two expiry futures in equal quantities. These contracts are tied to the same underlying asset, making this approach "market neutral" — the underlying asset's price movement doesn't directly affect the strategy's performance. This characteristic allows futures spread traders to make gains irrespective of whether the market trends upwards, downwards, or remains stagnant for the contract terms.

Suppose the underlying asset's price escalates ahead of the first contract's settlement date. In such a scenario, the long position gains value, whereas the short position incurs a loss. Conversely, a decrease in the underlying asset's price results in the short position making an earning while the long position suffers a loss.

However, since both positions were established simultaneously and are the same size, the net gain or loss should be approximately zero. Though this strategy requires both a long and a short position, traders often simplify their discourse by referencing "buying the futures spread" or "selling the futures spread". In this context, 'buying' and 'selling' refer to the first contract to settle, commonly termed the front-month or near-term contract.

If we 'buy' a BTC futures spread, we might purchase the BTC/USDT July futures contract and sell the BTC/USDT September contract. Conversely, 'selling' the same spread would involve selling the near contract (BTC/USDT July) and buying the longer-term contract (BTC/USDT September).

The decision to buy or sell the spread depends on the contract prices when entering the trade. If the near-term contract is priced lower than the longer-term one, many traders prefer to buy the spread — that is, purchase the near-term contract and sell the longer-term one. This situation, where longer-term contracts are priced higher than near-term contracts, is called 'contango'.

On the other hand, when the longer-term contract is priced lower than the near-term, traders will often sell the spread. A situation where the near-term expiry futures is priced higher than the longer-term contract is termed 'backwardation."

'Contango' usually happens when the market is optimistic about the future spot price of the underlying asset. This bullish sentiment leads traders to pay a premium for longer-term contracts, believing that the spot price will continue on its upward trajectory. The opposite scenario, 'backwardation', happens in bearish markets, where traders anticipate a drop in spot prices and sell longer-term futures. This action exerts downward pressure on expiry futures prices.

While several futures spreads are prevalent in traditional finance, the most common type in cryptocurrency markets is the 'intramarket spread', also known as a 'calendar spread'. This refers to two contracts with different settlement dates, but linked to the same underlying asset within the same market. For example, purchasing the BTC monthly and selling the BTC quarterly, or vice versa.

Cryptocurrency futures spreads can include a long and short expiry futures executed simultaneously, or a combination of an expiry futures and a perpetual futures, which is essentially a futures contract with no specified settlement date.

The defining features of a futures spread trade are:

  • It must encompass precisely two positions.

  • Both positions should share the same underlying asset.

  • The positions must be inverse, i.e., one long and one short.

  • The strategy should be market neutral.

  • The expiry futures must possess different settlement dates.

  • Both legs of the spread should consist of an identical quantity.

  • The trader's earnings derive from the price differential between the two contracts.

Futures spread example

To better illustrate futures spreads, let’s look at a hypothetical 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, making gains 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'd earn 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 gain 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'd earn 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 doesn't 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 asset’s price should equally affect both legs of the trade. Such an event could result in significantly greater gains 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, using 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 earnings 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

While futures spread trading can mitigate several risks associated with standalone positions in a market, it's essential to recognize that it isn't without its potential pitfalls. However, with careful management, these risks can be reduced.

A crucial risk to consider is leverage, which brings with it the potential for liquidation. Trading with leverage means your earnings and losses are magnified, so it's vital to tread carefully. If a trade fails to meet the margin requirements of a leveraged trade, your spread position could be partially or fully liquidated automatically.

Another risk is execution risk, which is associated with the attempt to place two trades at the same time when executing a futures spread. There may be instances where only one leg of the trade is filled, leaving the other unfulfilled. This situation could expose the trader to the same price volatility risk they hoped to avoid through a spread trading strategy.

OKX offers many tools to help counter execution risk. For example, when using our block trading platform's pre-established strategies to place a spread trade, both legs are executed at the same time or not at all. As a result, the chance of exposing yourself to volatility risk by entering only one leg of the trade is effectively eliminated.

By acknowledging and understanding these risks, traders can make more informed decisions and strategies when getting involved in futures spread trading.

Getting started with futures spreads on OKX

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 expiry futures and perpetual futures 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 with minimal 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.

Futures spread - Getting started
A visual showing how to access Futures Spread on OKX

You'll 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.”

Futures spread - Trading amounts
An image showing how to select each leg of the futures spread's expiry date, and the amount you want to trade.

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).

Futures spread - Buy or sell
An image showing how to buy or sell the spread of an asset when trading futures spread on OKX

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

Futures spread - Confirming your order
An image showing how to confirm your order when trading futures spread on OKX

You'll 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.

Futures spread - View open positions
An image showing how to view open positions when trading futures spread on OKX

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.

Futures spread 6 - trade leg history
An image showing how to view your trade leg history when trading futures spread with OKX

Earn from futures spreads on OKX

OKX works 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, Liquid Marketplace, but look out for the strategy being incorporated into our other products in the coming weeks and months.

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