Long one contract month and short another in the same product, so the position trades the shape of the curve rather than the level of price.
Buying July corn and selling December corn leaves you with almost no exposure to whether corn is cheap or dear. What you own is the July-December price difference, which is driven by old-crop supply, storage economics and cost-of-carry rather than by the headline price.
Exchanges recognise this and grant large spread-margin-credit, because the two legs offset. That makes spreads capital-efficient, but the low margin flatters the risk: a spread can move further than its margin implies when one leg is squeezed.
Spreads are quoted as a single number and traded as one order on globex, so both legs fill together. Legging in manually invites a fill on one side and a runaway market on the other.
Example: July corn 445'0, December corn 470'0, so the spread is -25 cents. If a drought tightens old crop and July rallies to 470'0 while December holds, the spread goes to 0 and a long July / short December position gains 25 cents x $50 per cent = $1,250 per spread.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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