Calendar Spread

A calendar spread (cso) is an option on the spread (or price differential) between two Futures contracts for a single exchange-traded (or listed) asset, rather than on the underlying asset itself.

It is sensitive to the value and volatility of the spread itself rather than to the price of the underlying asset.

The payout is the difference between the strike and the underlying on the expiry date, where the underlying is not the price of the asset itself, but rather the spread (or difference) between the prices of two futures contract.

The spread can be either of the following, depending on how you define the option:

Price of futures contract 1 - price of futures contract 2

Price of futures contract 2 - price of futures contract 1

It is supported for all listed assets in the system.

Why enter into a calendar spread?

A calendar spread lets you hedge the price difference between two future contracts.

For example, you are a storage company and you choose to enter into a calendar spread between the Dec 2012 futures contract (Contract 1) and the Dec 2013 futures contract (Contract 2), where you have defined the spread as the price of Contract 2 - price of Contract 1. While thinking that the spread between the two contract prices will increase, you still want to hedge against a possible decrease in that spread. To hedge against a decrease in the spread, you can buy a calendar spread put.

Pricing a calendar spread in SDX Commodities & Energy

When pricing a calendar spread (cso), it is important to note the following:

The expiry date of the option must be prior to the expiry date of the first futures contract in the option.

If you are using your own data source, you can only price a calendar spread on an asset if the volatility mode for that asset is set to Sticky Delta in the Volatility Data window. If it is set to Sticky Strike, you cannot price a calendar spread on that asset.

When defining the futures contract you must enter an actual futures contract.

To see a list of the actual futures contract, see the asset's Term Structure page > Future Contract column. You can access its Term Structure as follows:

On the ribbon bar from the Trader, Structurer and Market Data tabs.

From the Home tab > Open button.

From the left hand side of the pricing page.

Currently the volume of both the futures contracts is linked.

The correlation is between the futures contracts.