## The Benefits of Bid-Offer Spreads

What does it mean when we say the energy complex is highly liquid with a tight bid offer spread? Is it a good thing?

One thing traders look for is the ability to get in and out of a market efficiently. A tight bid-offer spread makes that possible.

## Tight Bid-Offer in Futures versus ETFs

An ETF is a security that tracks an index, a commodity, or a basket of assets like an index fund but trades like a stock on an exchange. A futures contract, on the other hand, is a contractual agreement to buy or sell a particular commodity or financial instrument at a predetermined price in the future.

### Example

A Crude Oil futures contract is currently priced at \$100 per barrel and one futures contract is comprised of 1,000 barrels of oil. One thousand barrels times \$100 gives the trader control of a notional value of \$100,000. Since the minimum price fluctuation, or tick, for this contract is \$0.01 per barrel, then a one-tick change would be worth \$10.

Crude Oil Futures Notional = 1,000 barrels X \$100

Crude Oil Futures Notional = \$100,000

If the current price of a crude oil ETF share is \$38, in order for an investor to manage the same notional value of one futures contract (\$100,000), the investor would need to purchase the equivalent of 2,632 ETF shares.

Assuming 1 Oil ETF share = \$38

Number of ETF shares to equate to 1 oil futures contract notional = \$100,000 / \$38 = 2,632 shares

Assume the ETF also trades in \$0.01 increments. A one-tick price movement in the ETF position would equate to a change of \$26.32 while a one-tick move in the futures contract is only \$10.

## Conclusion

Tight bid offer spreads may lower one of the costs associated with getting into and out of a position.

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