Crack Spread

What is Crack Spread?

Crack spread is a term used in oil futures trading and is derived from the chemical process of cracking (heating crude oil to certain temperatures to distill off different grades of fuel). A crack spread is a hedge created by going long in oil futures whilst shorting gasoline and heating oil futures.

Gasoline and heating oil are both created from cracking crude oil so their prices are related. Therefore, if the price of crude changes the prices of gasoline and heating oil will move in the same direction (although not necessarily by the same amount) so by being long one and short the other, the investor is hedged. The purpose of a crack spread is simply to hedge against changes in the future price of oil.

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