Futures Spread Trading: Types, Use Cases, Benefits, and Risk

Published on July 31, 2025 | 2 min read

Summary

A futures spread is a trading strategy in which a trader holds a long position in one futures contract and a short position in another. In this trading strategy, the underlying asset and expiration dates can be different, which depends on the type of spread you are trading.

Key Takeaways

A futures spread trading strategy is a non-directional strategy which works well in a sideways market.
This trading strategy helps to hedge the risk and reduce the margin requirements.
Futures spread trading strategy can be of three types: Intra-market, Inter-market and pair trading.

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Understanding Futures Spread Trading

A futures spread trading strategy involves holding both a long and a short position in futures contracts at the same time.

In this strategy, traders aim to profit from the price difference between current-month and next-month futures contracts, rather than predicting the overall market direction.

When trading futures, maintaining an upfront margin is mandatory; however, this strategy reduces the required trading margin by 50% to 70% because you are simultaneously buying and selling the same contract.

Types of Futures Spread

Futures spreads are mainly divided into three types:

Intra-market Spread

This involves buying and selling futures contracts for the same underlying asset, but with different expiry months. It is also known as a calendar spread.

Inter-market Spread

This involves buying and selling the same underlying asset on two different exchanges.

Pair Trading

This involves taking a combination of long and short positions in two correlated stocks or indices. For example, taking a long position in TCS futures and a short position in Infosys futures.

Benefits of Trading Futures Spread

Futures spread trading has certain benefits:

Reduce Margin Requirements

Trading futures typically requires a high margin, but buying and selling futures contracts simultaneously with different expiries can reduce the margin requirement due to hedging.

Reduce Volatility and Risk

Being long in one contract and short in another often means that price movements in the same direction offset each other. This minimises the risk of extreme market movements and volatility.

Profit in sideways market conditions

Instead of relying on a strong upward or downward move, futures spread traders aim to capture the price difference between two contracts.

Risk Involved in Futures Spread Trading

Futures spread trading strategies also involve certain risks:

Market Risk

Unusual price movements in the underlying asset can result in losses, even in spread positions.

Liquidity Risk

Some contracts in spread positions may be illiquid. Traders may face difficulties exiting the trade if buyers and sellers are unavailable.

Execution Risk

While executing the trades, slippage might happen, which can affect the overall profitability.

Margin Call Risk

Adverse spread movements can increase margin requirements and lead to margin calls, potentially forcing liquidation at unfavourable prices.

Common Mistakes to Avoid While Using Futures Spreads

Here are the common mistakes to avoid while trading futures:

Trading without a comprehensive plan

Futures trading requires a thorough understanding of derivatives and markets. Trading without a plan of proper entry, exit and adjustments can impact the profitability.

Ignoring cost

Before trading futures, it is important to calculate the cost and how many points are required for breakeven. Futures can be expensive due to various taxes and other costs.

Improper Leg Execution

While executing the futures spread strategy, make sure to execute proper legs to gain from the difference in contract spread.

A futures trading strategy is a market-neutral strategy approach in which traders build long and short positions simultaneously. It aims to benefit from the price differences between contracts with different expiration months.

Futures traders use this strategy to hedge the risk and minimise the margin requirements. However, if the market reacts violently, the strategy might not work well.

About Author

Subhasish Mandal

Sub-Editor

Finance professional with strong expertise in stock market and personal finance writing, he excels at breaking down complex financial concepts into simple, actionable insights. Holding a Master’s degree in Commerce, he combines academic depth with practical knowledge of technical analysis and derivatives.

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About Upstox

Upstox is a leading Indian financial services company that offers online trading and investment services in stocks, commodities, currencies, mutual funds, and more. Founded in 2009 and headquartered in Mumbai, Upstox is backed by prominent investors including Ratan Tata, Tiger Global, and Kalaari Capital. It operates under RKSV Securities and is registered with SEBI, NSE, BSE, and other regulatory bodies, ensuring secure and compliant trading experiences.