Crush spreads involve buying futures and selling products made from those commodities to create an artificial interest and increase the value of futures. The soybean futures strategy is a good example. Investors use crush spreads to correct mispricing and generate additional income.
Crush spreads are strategies that make use of a double trade model associated with a particular commodity in order to maximize the opportunity to establish a favorable position. In general, structuring a crush spread will involve buying a futures position, while also arranging for the sale of products that can be produced using those commodities. The idea is to create an artificial interest which in turn helps to increase the value of the futures purchased and produce a higher return on investment.
One of the best examples of how a crush spread can work is illustrated by the use of the soybean futures strategy. As a first step in the process, the investor will buy these futures as part of a long-term investment strategy. At the same time, it will engage in selling future options that have to do with products that can be made from soybeans. For example, the investor would sell futures dealing in soybean oil or soy-based vegetarian food products. Soybean meal futures are another possible type of futures that the investor would place on the open market for sale as part of creating the crush spread.
What this combination of buying soybean futures and selling off futures involving specific types of soybean products is that it can create a spread in value between raw products and finished products. Because the process can stimulate interest in finished products and associated futures options, the value of commodity futures is likely to increase. Thus, the investor can help correct what can be seen as a disparity between the prices of different futures options while also generating additional income.
It is important to note that investors will not necessarily try to create a crush spread at random. The relative prices of futures themselves are often a factor in whether some degree of mispricing is currently in the market. If there are perceptions of mispricing on various crude or finished product futures, implementing a crush spread is often seen as correcting the pricing situation while still stimulating interest and trading activity to the benefit of all the subjects involved.
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