There are many ways to try to make money trading crude futures.  One way to make money is to put on a crude futures spread.  A spread is a simple way of saying you are long one month of crude futures and short a different month.  The margin on spreads is a bit less than trading an outright month because the risk is possibly less.  You can lose a lot of money if you’re not careful with trading spreads but the volatility is usually less in these specific trades.

For example, let’s say a trader is long 100 contracts of April crude futures at a price of $40.00 and May crude futures is trading at $43.00.  This is known as a contango market when the spot price is at a discount to the future price.  The April/May spread is trading at a negative value of -($3.00).  In the coming days a war breaks out in the Middle East moving April up $3.00 to $43.00 and May up $2.75 to  $45.75.  You believe that prices will remain high but want to take your money out of the way and still be long the April contract.  You notice that the relationship between April and May is getting stronger as the spread has come in .25 cents to ($2.75).  You now sell 100 lots of May at $45.75 and have a position of long 100 April at $40.00 and short 100 May at $45.75.  You are now Long 100 April/May at ($5.75).  April/May is currently worth ($2.75).  You now have an unrealized gain of $300,000 (100 lots x $3.00 x 10).  The war is now escalating and April is up another dollar as traders buy the front month but May is up only .50 cents.  Now the spread has gotten even stronger by another .50 cents to ($2.25).  You have made another .50 cents on 100 contracts which is a profit of $50,000.  There could be some sort of peace treaty and you may want to get out of your positions for  fear that April could get knocked down in the next coming days.  Instead of just selling the outright April and buying the outright May in the open market and get caught losing a couple of pennies legging the spread, you can just sell the April/May contract at ($2.25) and realize the full $3.50 cents you have just made on 100 lots for a total of $350,000.

There are no guarantees you won’t lose this and more in the markets.

All of the big time traders use these spreads to their advantages as you can possibly make some money if you are patient and careful.  It is a lot less stressful than watching flatprice move up and down all day.  If you have a spread on, you care about  the difference between the two months.  If you are long the spread (long the front month, short the back) you would hope to see the spread narrow on the negative and expand on the positive, and vice versa.  These are just another gadget in your tool belt to hopefully hammer out profits.

Trading in futures and options involves a substantial degree of a risk of loss and is not suitable for all investors. Past performance is not indicative of future results.