In commodities/oil you have monthly contracts for a given Future, e.g. on CME the Crude Oil Futures (CL) monthly contracts can be trades, and have Globex codes such as CLZ8(Crude Oil Dec18 Future), CLF9...etc
The monthly futures are liquid and it is often the case where traders long one month (near month) and short the other (far month) or vice versa to obtain a spread between the 2 months. The reason being there is correlation between the months and by being long and short the different months, you can hold a spread position between these contracts.
To manually obtain a spread position of -10, one must put an order for the first contract and then the other
e.g. BUY CLZ8 @ 60 and then SELL CLF9 @ 70.
But the price of the CLF9 contract could move from 70 to 68 which would mean that you'll end up with a spread of -8 rather than -10.
CME and other exchanges often offer intra-commodity spreads (also know as Calendar Spreads, or Time Spreads) where the spread values for a given Commodity and underlying months can be traded.
My question about these spread. For example lets say in the DOM (Depth Of Market) for the CLZ8-CLF9 spread contract the Best Ask is -10, which means i can buy it at this price, if i enter a market order to buy this spread, then what really happens:
- Does the exchange simply offer this by putting in a Buy order for CLZ8 and a Sell order for CLF9?
- If (1) is true, then how does the exchange handle the scenario where if the the it fills the Buy order of CLZ8 at 60 but the prices of the CLF9 moves away from 70 and does not go back to 70 so the exchange cannot reach the CLZ8-CLF9 spread value of -10
- Or is (1) false and the when a spread contract is traded then you do not enter 2 orders for the different months, you get filled straight away as the spread contract market is a market of its own and separate from the individual month future contracts.
- If (3) is the way it works such that spread-contracts have a market of there own then what price do you receive for the 2 separate future months? does putting a spread-contract contract show up or affect the DOM(Depth Of Market) for the underlying individual month contracts?