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A Complete Guide to the Futures mArket
commodity is too high or low relative to a closely related commodity. some examples of this 
type of spread include long december cattle/short december hogs and long July wheat/short 
July corn. The source/product spread, which involves a commodity and its by-product(s)—for 
example, soybeans versus soybean meal and/or soybean oil—is a specific type of intercommod-
ity spread that is sometimes classified separately.
usually, an intercommodity spread will involve the same month in each commodity, but 
this need not always be the case. ideally, traders should choose the month they consider the 
strongest in the market they are buying and the month they consider the weakest in the market 
they are selling. Obviously, these will not always be the same month. For example, assume the 
following price configuration:
December February april
Cattle 120.00 116.00 118.00
Hogs 84.00 81.00 81.00
given this price structure, a trader might decide the premium of cattle to hogs is too small 
and will likely increase. this trading bias would dictate the initiation of a long cattle/short hog 
spread. However, the trader may also believe February cattle is underpriced relative to other 
cattle months and that december hogs are overpriced relative to the other hog contracts. in 
such a case, it would make more sense for the trader to be long February cattle/short decem-
ber hogs rather than long december cattle/short december hogs or long February cattle/short 
February hogs.
One important factor to keep in mind when trading intercommodity spreads is that contract 
sizes may differ for each commodity. For example, the contract size for euro futures is 125,000 
units, whereas the contract size for British pound futures is 62,500 units. 
thus, a euro/British 
pound spread consisting of one long contract could vary even if the price difference between 
the two markets remained unchanged. 
the difference in price levels is another important fac-
tor relevant to contract ratios for intercommodity spreads. the criteria and methodology for 
determining appropriate contract ratios for intercommodity spreads are discussed in the next 
chapter.
 3. the intermarket spread. this spread involves buying a commodity at one exchange and sell-
ing the same commodity at another exchange, which will often be another country. An example 
of this type of spread would be long 
new Y ork March cocoa/short London March cocoa. trans-
portation, grades deliverable, distribution of supply (total and deliverable) relative to location, 
and historical and seasonal basis relationships are the primary considerations in this type of 
spread. 
in the case of intermarket spreads involving different countries, currency fluctuations 
become a major consideration. intermarket spread trading is often referred to as arbitrage. As 
a rule, the intermarket spread requires a greater degree of sophistication and comprehensive 
familiarity with the commodity in question than other types of spreads.