Long one product and short a different but economically tied one — crude against refined products, soybeans against meal and oil, grain against livestock. The differential normally stands for a processing or substitution margin somebody in the physical market genuinely earns, and that is what separates it from a statistical pairs trade with a pretty chart. It breaks when the physical link breaks: an outage, a change in yields, a shift in ratios moves the spread for reasons no price history saw coming. Set the leg ratios here and read the differential in the units a processor would use, not as the difference of two screen prices.
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Three separate futures legs at a fixed ratio, usually available as a single 'crack spread' order on exchanges that list the combination directly — check whether the venue offers the ratio as one ticket before legging in manually, since the ratio itself is the entire point of the trade. Contract sizes differ across the three products, which is exactly why a ratio like 3:2:1 exists rather than a simple 1:1:1; using the wrong contract counts turns this into an unintended outright position in whichever product is over- or under-weighted.
Getting the contract ratio right is the whole trade — a 3:2:1 crack spread entered as 1:1:1 is not a smaller version of the same position, it is a different and unintended outright bet weighted toward whichever leg is under-hedged relative to its true ratio. Margin is set on the combination where the exchange recognizes it as a defined spread; legging in the three contracts separately at full outright margin on each defeats the purpose of trading the relationship rather than the individual legs. Seasonal patterns in the ratio are well known and already reflected in the price by the time they appear in a seasonal chart.
Common mistake. The common mistake is entering the three legs at a round 1:1:1 ratio for simplicity, which is not a smaller version of the crack spread but a different, unhedged outright position.
| # | Action | Instrument | Strike |
|---|---|---|---|
| 1 | Buy ×3 | Crude oil future | — |
| 2 | Sell ×2 | Gasoline future | — |
| 3 | Sell ×1 | Heating oil future | — |
| Role | Instrument | Position |
|---|---|---|
| Input | Crude oil | 3 contracts, long |
| Output | Gasoline | 2 contracts, short |
| Output | Heating oil | 1 contract, short |
| Strategy | Market view | Opened for | Legs vs. this one |
|---|---|---|---|
| Futures Spread | Relative value — non-directional | Margin | -1 |
| Futures Calendar Spread | Term structure — non-directional | Margin | -1 |
| Futures Outright | Directional — leveraged, linear | Margin | -2 |
| Futures Basis Trade | Arbitrage — carry capture | Margin | -1 |