Commodity Product Spreads: Definition & Profit Potential

A commodity product spread is a transaction that involves simultaneously purchasing a commodity and selling a product made from that commodity. The transaction is supposed to occur at one time, but there is usually a small difference between when the commodity is purchased and when the product is sold. Despite this small gap, the transaction goal can be met.

Transaction Goal

The goal of the transaction is to profit when a commodity price is high. The sale of the ultimate product covers the cost of purchasing a futures contract on the commodity itself, so the investor nets a profit despite making a purchase. The investor is heavily tied to the success of one type of commodity throughout the transaction.

Example

For example, an investor could sell heating oil on one end of a transaction and buy crude oil on the other. The profit made on the sale of the oil would more than cover the cost of the crude oil, netting a profit for the investor and providing an additional chance for profit down the line. Most novice investors will not engage in a commodity product spread. This type of trade is carried out by commodities trading firms, commodity mutual funds or commodity-focused hedge funds.