What you will learn
- Leg sizing
- Relative versus outright exposure
- Spread execution
- Expiry and liquidity migration
Leg sizing
A calendar spread combines different expiries. Define both leg quantities, multipliers and direction. Equal contract counts do not always mean equal economic exposure if specifications differ.
Relative versus outright exposure
A spread reduces some common outright exposure but retains exposure to changes in the price relationship. It can lose even if both legs move in the same direction. Evaluate the net sensitivity rather than treating two legs as automatically neutral.
Spread execution
Legging introduces execution risk when one side fills before the other. A quoted spread instrument may have different execution mechanics from two separate orders. Model the method actually used.
Expiry and liquidity migration
Liquidity often migrates between expiries, and deadlines can force action. Include the roll or exit plan in the study. A profitable historical spread path is irrelevant if the assumed legs were not tradable at the modeled size and time.
Worked example
Buy the near contract at 100 and sell the deferred at 103, equal multiplier one. Later they are 102 and 106. The near leg gains 2 and the deferred short loses 3: net loss is 1.
Try it yourself
Repeat when the later prices are 102 and 104. Explain which relationship change benefited the position.
Show the worked solution
The near gains 2 and the deferred short loses 1, for net gain 1. The deferred-minus-near spread narrowed from 3 to 2, benefiting a long-near/short-deferred position under these assumptions.
Apply this to your course project
Build a two-expiry scenario sheet with carry assumptions and roll-cost sensitivity.
Keep the calculation inputs, assumptions and decisions with your work. Practical exercises are self-reviewed; the scored knowledge checks assess the questions shown, not an independent certification of practical competence.