TABLE OF CONTENTS Spreading as a futures technique is as old as the markets themselves and is probably the single largest source of market liquidity, particularly in the forward months. Indeed, spread participants are the backbone of market liquidity, without which no viable futures market can exist.
Leo Melamed, former chairman of CME and IMM
A natural extension of the intracommodity futures spread trades described in Chapter 3 is the butterfly (e.g., Schwager, 1984). Because the butterfly can be interpreted as an intracommodity tandem trade, it also provides a useful introduction to intercommodity trades. Recognizing that there are a number of possible variations on butterfly trades, consider the following generic version: short (long) one nearby contract; long (short) two contracts of an intermediate delivery date contract; and, short (long) one distant delivery contract. The interpretation of the trade can be captured as a "spread of spreads," a combination of a short (long) nearby spread and a long (short) deferred spread. The trades supporting the profit function are described in Table 5.1.
| Date | Nearby ( N) position | Intermediate ( T) | Distant position ( T*) |
|---|---|---|---|
| t = 0 | Short 1 at F(0 ,N) | Long 1 at F(0 ,T) | |
| Long 1 at F(0 ,T) | Short 1 at |
