A long-short position in two different but economically linked futures products, such as corn against wheat or gold against silver.
The trade expresses a view on the relationship rather than the direction of either market. Because the two products have different contract-multiplier values, the legs are usually ratio-weighted so the dollar exposure matches, not the contract count.
Exchanges publish recognised intercommodity spread credits for pairs whose correlation they accept, which cuts margin substantially. Pairs the exchange does not recognise are margined as two separate outright positions.
The risk that kills these trades is that the historical relationship is not a law. Correlations break exactly when one leg has a supply shock, and the spread trader is then short the market that is going up.
Example: corn and wheat are both 5,000-bushel contracts, so one-for-one works. Gold (100 oz) against silver (5,000 oz) does not: at $2,400 gold and $30 silver the notionals are $240,000 and $150,000, so you need roughly 5 gold to 8 silver for a balanced gold-silver-ratio trade.
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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