Systematic Trading in the Soybean Oil Calendar Spread
Soybean Oil has been exchange-traded in Chicago since 1950 and remains a highly liquid market with a daily open interest of over 500,000 contracts at the CME.
In this blog post, I will outline a novel approach that systematically exploits seasonal tendencies in soybean oil futures.
What Is a Calendar Spread?
A calendar spread involves simultaneously taking long and short positions in different expiration months for the same commodity. For example, you could go long on March soybean oil (ZLH25) while shorting May soybean oil (ZLK25). The primary goal here is to capitalize on changes in the term structure of a commodity, betting on how the slope of the forward price curve will shift.
Why Trade Calendar Spreads?
There are several unique benefits to trading calendar spreads, including:
- Capital Efficiency: Lower margin requirements allow for greater diversification, even in small accounts.
- Dollar Neutrality: Spreads offer differentiated performance compared to outright commodity trades.
- Lower Volatility: This naturally helps in risk management.
In the below tables we see the current maintenance margins for outright futures in soybean oil ($1,800) and the margin for a spread ($150). At less than 1/10th of the margin requirement, it’s possible to have many spread markets in a medium or small sized account, for example a portfolio of soybean oil spreads, heating oil spreads, copper spreads, corn spreads, wheat spreads in a $10,000 account.
Understanding Commodity Term Structure
Soybean oil futures have multiple expirations listed at all times with the front month contracts that are highly liquid and amenable to be traded as spreads. Interestingly, the spreads have their own markets with their own bid/asks that can often be even more liquid and highly traded than the underlying outright futures. Here is a listing of the contracts available as of early February 2025:
If we plot these contracts on a graph we get this term structure:
We see that the price is increasing in the first 3 contracts and then decreasing. An upward sloping term structure is defined by the term ‘contango’ and downward sloping is known as ‘backwardation’.
The slope of the commodity term structure is influenced by various factors, such as:
- Supply and Demand
- Carry Costs
- Exchange Rates
In spread trading, we are speculating on the change in slope between any two points in the term structure.
Seasonal Tendencies in Soybean Oil Spreads
In the below table I have calculated the monthly PNL of being long the near contract of soybean oil and short the far month. For context, this means that in Feb 2025, you would be long the March 2025 contract and short the July 2025 contract.
Based on this table, we can see seasonal tendencies in the spread. Here are equity curves if we are long or short the spread in certain months (45 year backtest from 1980-2025):
The backtest looks good, however, one limitation of static seasonal rules is that they rely on foresight about which monthly tendencies will continue working in the future—a practice prone to curve fitting.
A Smarter Approach: Adaptive Seasonal Strategy
Rather than sticking with static rules, an adaptive seasonal strategy predicts the spread’s tendency based on its behavior in prior years. For instance:
- if the spread has consistently widened during March in the trailing years, then be long the spread in the coming March
- if the spread has consistently narrowed during March in the trailing years, then be short the spread in the coming March
This rolling, data-driven approach adjusts dynamically to market conditions, removing the need for long-term seasonal predictions.
The above chart shows the behavior of the spread during March from 1989 to 2025. We can see that as the spread trended up from 1989 to 2002, the signal was +1 and as the spread trended down from 2002 to 2020 the signal was -1. Then the signal responded to recent fluctuations with a directional flip.
The signal recalculates based on the rolling trend of the spread and below is the backtest of applying the adaptive system to the soybean oil calendar spread:
The gray line is the naive strategy of always being long the front month and short the back month and rolling forward – this can be taken as the benchmark. The black line is the equity curve of the adaptive seasonal strategy where is it clear that there is an edge here.
There is, however, more volatility that we would like. Next I will apply a risk management rule to lessen the drawdowns.
Enhancing the Strategy with Risk Management
Adding a stop-loss can significantly improve performance and reduce risk: add a fixed $ stop loss upon entering the spread trade at the start of the month. If the spread PNL goes against you by the stop loss amount then go flat for the remainder of the month. Then re-enter a new position at the start of next month.
Here’s the improvement:
Conclusion
Seasonal tendencies in commodity markets like soybean oil persist but are subject to change over time. By adopting an adaptive strategy that trades in the direction of the prevailing tendency, traders can become fully systematic and avoid having to rely on ‘rules of thumb’ & opinion-based forecasts on seasonality.
