Since the margins and the lot sizes are quite low in case of crude oil, spreads are quite popular and also feasible. When you initiate a crude contract on MCX, the initial margin payable is 4% and the extreme loss margin is 1% making the total payable margin at 5%. Now, typically, the Big Crude contract has a notional lot size of 100 barrels. At the current futures price of Rs.3136, the minimum lot size works out to Rs.313,600. Payment of 5% margin on that comes just about Rs.16,000 and that is what makes spreads on crude oil quite popular. Let us look at the types of spreads in the crude oil market.

Firstly, there is the imperfect calendar spread. For example if the September 2017 Big Crude is quoting at Rs.3100/bbl and the October 2017 Big Crude is quoting at Rs.3192/bbl, then the calendar spread between the two months is nearly 3%. If the standard roll cost and other charges for the contract is around 1%, then the spread trader can capitalize by buying the September Crude Futures and selling the October Crude Futures. That way you can lock in the spread and earn a margin even after considering the rollover cost.

Secondly, there is also the possibility of a spread between the Big Crude and Mini Crude in the same month. Normally, the spread is very narrow considering that the underlying is the same in both cases. However, there are times when disruptions cause spreads. For example if the August Big Crude is quoting at Rs.3160/bbl and the August Mini Crude is quoting at Rs.3190/bbl, then the spread trader can buy the August Big Crude and sell the August Mini Crude. This way, the 1% spread can be locked in as both the contract underlying will mature at the same price. The only thing to be remembered is that you need to do contract size matching. So, to get a perfect spread in the above case, you will have to sell 10 lots of Mini Crude against 1 lot of Big Crude.