Crushing spreads involve buying futures and selling products that can be produced using those products to create artificial interest and increase the value of futures purchased. This strategy can correct price disparities and generate additional income. Smart Assets.
Crushing spreads are strategies that use a dual transaction model associated with a particular product to maximize the opportunity to establish a favorable position. In general, the structure of a crushing spread will involve buying a futures position, while arranging to sell products that can be produced using those products. The idea is to create artificial interest which in turn helps increase the value of the futures purchased and generate a higher return on investment.
Using the strategy with soybean futures illustrates one of the best examples of how a crush can work. As the first step in the process, the investor will purchase these futures as part of a long-term investment strategy. At the same time, he or she will participate in the sale of futures options that have to do with products that can be made from soybeans. For example, the investor would sell futures that had to do with soybean oil or vegetarian food products made from soybeans. Soybean meal futures are another possible type of futures that an investor would place on the open market for sale as part of creating the crush spread.
What this combination of buying soybean futures with selling futures involving specific types of soybean products is that it can create a difference in value between raw materials and finished products. Because the process can stimulate interest in finished goods and their associated futures options, the value of commodity futures is likely to increase. Therefore, the investor can help correct what may be seen as a disparity between the prices of different futures options and still generate additional income at the same time.
It is important to note that investors will not necessarily try to create a random crush. The relative prices of futures themselves are often a factor in determining whether any degree of pricing is currently present in the market. If there is a perception of mispricing in the various crude or finished product futures, the implementation of a crushing spread is often seen as a correction of the price situation while stimulating interest and trading activity. which ultimately benefits everyone involved.
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