Multi-Asset Spread Trading

Contributor Image
Written By
Contributor Image
Written By
Dan Buckley
Dan Buckley is an US-based trader, consultant, and part-time writer with a background in macroeconomics and mathematical finance. He trades and writes about a variety of asset classes, including equities, fixed income, commodities, currencies, and interest rates. As a writer, his goal is to explain trading and finance concepts in levels of detail that could appeal to a range of audiences, from novice traders to those with more experienced backgrounds.

Multi-asset spread trading is a trading strategy involving the simultaneous buying and selling of different assets to capitalize on the price differences between them.

This technique tries to exploit relative price movements rather than outright price direction.

This makes it a popular approach among professional traders and hedge funds looking for non-correlation to traditional asset classes.


Key Takeaways – Multi-Asset Spread Trading

  • Diversification Benefits
    • Multi-asset spread trading allows traders to diversify risk by simultaneously taking long and short positions across different assets.
    • This can reduce exposure to single market volatility.
  • Arbitrage Opportunities
    • Traders can exploit price discrepancies between related assets or markets.
    • This can capitalize on temporary imbalances for potential profits.
  • Hedging Strategies
    • This approach provides effective hedging against adverse market movements.
    • It can balance portfolio risk and improve stability.


What is Multi-Asset Spread Trading?

Multi-asset spread trading involves taking long and short positions in different assets or asset classes.

The goal is to profit from the relative price changes between the assets rather than their absolute price movements.

Traders engage in this strategy to hedge risks, diversify portfolios, or exploit potential market inefficiencies.

Example of Multi-Asset Spread Trading

An example would be discounted sets of market conditions that can’t logically co-exist across asset classes.

For instance, if:

  • the bond market portends to fall in price due to the expectation for inflation to increase and
  • equities are priced to rise while earnings are projected to stay steady…

…this might not make sense.

If earnings are projected to remain steady and inflation rises, this generally means higher interest rates and a lower equity market, all else equal.

How you trade it is up to you (e.g., short equities, short bonds), but something would have to give in this scenario for this set of discounted pricing to make sense.


Types of Spreads

Inter-Commodity Spreads

Inter-commodity spreads involve trading two different but related commodities.

For example, a trader might buy crude oil futures while selling natural gas futures, anticipating that the price of crude oil will rise relative to natural gas.

Intra-Commodity Spreads

Intra-commodity spreads involve trading different contracts of the same commodity.

This can include:

  • calendar spreads (buying and selling futures contracts of the same commodity with different expiration dates) or
  • quality spreads (trading different grades of the same commodity)

Inter-Market Spreads

Inter-market spreads involve trading assets from different markets.

For instance, a trader might take a long position in the S&P 500 index futures while taking a short position in the NASDAQ 100 futures, betting on the performance differential between these two indices.

Cross-Asset Spreads

Cross-asset spreads involve trading different asset classes.

A common example is taking a long position in bonds and a short position in equities, or vice versa or some combination thereof like in our example in the previous section.

This is to benefit from the relative movement between these asset classes.


Benefits of Multi-Asset Spread Trading

Risk Reduction

By trading multiple assets, spread trading can reduce exposure to the overall market direction and specific asset volatility, as losses in one position may be offset by gains in another.


Multi-asset spread trading provides diversification benefits, as traders are not reliant on the performance of a single asset.

This strategy allows for a more balanced and resilient portfolio.

Capital Efficiency

Spread trading often requires lower margin requirements compared to outright positions, as the offsetting nature of the trades reduces the risk perceived by brokers and clearing houses.

It depends, though. Portfolio margin will generally be more lenient than Reg T.


Key Considerations in Multi-Asset Spread Trading

Correlation Analysis

Understanding the correlation between assets is important.

Traders need to analyze historical price relationships and be sure that the chosen assets have a predictable and exploitable correlation.

Correlations are dynamic and it’s important to understand the true drivers of asset returns rather than fleeting mathematical relationships.

Market Liquidity

Liquidity is essential in spread trading.

Traders must make sure that the assets involved in the spread have sufficient market depth to enter and exit positions without significantly impacting prices.

Transaction Costs

Since spread trading involves multiple positions, transaction costs can accumulate.

Traders need to account for these costs to be sure that the potential profits from the spread exceed the expenses incurred.


Examples of Multi-Asset Spread Trades

Gold vs. Silver Spread

A trader might take a long position in gold futures while shorting silver futures – i.e., anticipating that gold will outperform silver due to macroeconomic factors or changes in demand and supply dynamics.

Gold also tends to correlate less with global credit cycles than silver (since gold isn’t used in industrial processes to the same extent as a proportion of the market), so this can also be a risk-off type of position.

Energy Spread: Crude Oil vs. Natural Gas

By buying crude oil futures and selling natural gas futures, a trader can exploit the relative price movements driven by seasonal demand changes, geopolitical events, or differing supply conditions.

Equity vs. Bond Spread

In this spread, a trader might go long on stock index futures and short on government bond futures, betting that equities will outperform bonds in a risk-on environment where traders favor higher returns from stocks over the safety of bonds.

Let’s look at some examples of multi-asset spread trade:

Example 1: Gold vs. Silver Spread

Market Analysis

Conduct analysis to determine the current price relationship and historical correlation between gold and silver.

Suppose the trader finds that gold tends to outperform silver in times of economic uncertainty.

Position Sizing

Decide the amount to trade.

Assume the trader wants to trade $100,000 in the spread.

Calculate Ratios

Determine the appropriate ratio of gold to silver based on their price and contract specifications.

  • Current gold price: $2,500 per ounce
  • Current silver price: $25 per ounce
  • Standard contract sizes: Gold (100 ounces), Silver (5,000 ounces)
  • Ratio: (Gold price / Silver price) * (Gold contract size / Silver contract size) = (2500 / 25) * (100 / 5,000) = 2

Execute Trades

  • Buy 1 gold futures contract (100 ounces * $2,500 = $250,000)
  • Sell 2 silver futures contracts (5000 ounces/contract * 2 contracts * $25 = $250,000)

Monitor Positions

Track the relative performance of gold and silver. If gold increases in price relative to silver, the trader profits from the spread.

Close Positions

Once the desired spread profit is achieved or risk thresholds are met, close both positions.

Assume gold rises to $3,000 per ounce and silver remains at $25 per ounce.

  • Gold position value: 100 * $3,000 = $300,000 (Profit = $50,000)
  • Silver position value: 2 * 5000 * $25 = $250,000 (No change)
  • Net profit: $50,000


Example 2: Crude Oil vs. Natural Gas Spread

Market Analysis

Determine the seasonal demand and supply factors affecting crude oil and natural gas prices.

Position Sizing

Decide to invest $50,000 in the spread.

Calculate Ratios

Determine the appropriate ratio based on prices and contract sizes.

  • Current crude oil price: $70 per barrel
  • Current natural gas price: $3.5 per million BTU (MMBtu)
  • Standard contract sizes: Crude oil (1,000 barrels), Natural gas (10,000 MMBtu)
  • Ratio: (Crude oil price / Natural gas price) * (Crude oil contract size / Natural gas contract size) = (70 / 3.5) * (1,000 / 10,000) = 2

Execute Trades

  • Buy 1 crude oil futures contract (1000 barrels * $70 = $70,000)
  • Sell 2 natural gas futures contracts (10,000 MMBtu/contract * 2 contracts * $3.5 = $70,000)

Monitor Positions

Observe the price movements based on seasonal trends.

If crude oil increases in price relative to natural gas, the trader profits from the spread.

Close Positions

Close both positions when the desired profit is achieved.

Assume crude oil rises to $80 per barrel and natural gas remains at $3.5 per MMBtu.

  • Crude oil position value: 1000 * $80 = $80,000 (Profit = $10,000)
  • Natural gas position value: 2 * 10,000 * $3.5 = $70,000 (No change)
  • Net profit: $10,000


Example 3: Equity vs. Bond Spread

Market Analysis

Analyze macroeconomic indicators to predict the performance of equities versus bonds.

Position Sizing

Allocate $200,000 to the spread.

Calculate Ratios

Determine the ratio based on index levels and bond prices.

  • S&P 500 index level: 5,000
  • Treasury bond price: $100 per bond
  • Standard contract sizes: S&P 500 futures (value = index level * $50), Treasury bond futures (value = $100,000 per contract)
  • Ratio: (S&P 500 index level * $50) / ($100,000) = (5000 * 50) / 100000 = 2.5

Execute Trades

  • Buy 2 S&P 500 futures contracts (2 * 5000 * $50 = $500,000)
  • Sell 5 Treasury bond futures contracts (45* $100,000 = $500,000)

Monitor Positions

Track economic data and market trends.

If equities outperform bonds, the trader profits from the spread.

Close Positions

Close positions when the profit target is met.

  • Assume S&P 500 rises to 6,000 and Treasury bonds remain at $100.
  • S&P 500 position value: 2 * 6000 * $50 = $600,000 (Profit = $100,000)
  • Treasury bond position value: 5 * $100,000 = $500,000 (No change)
  • Net profit: $100,000