“Price curve differences: Yen” (below) shows the differences between call price curves December-September and September-June on Feb. 1, 2013. At the 1.10 strike price, the September-June difference is $1,162.50 and December-September is $975. The call premiums for December, September and June are $4,537.50, $3,600 and $2,475, while the respective futures contracts are priced at 1.0817, 1.0804 and 1.0783, representing a contango relationship. The futures price per point is $125,000.
Assuming that the call price spreads maintain the same differences, the trade begins with buying December and selling September with a net debit of $937.50, and is closed out by selling December at $3,600 and buying September at $2,475 for a net gain of $1,125. The hypothetical trading profit of $197.50, or 21%, depends on the spreads remaining constant, so the actual result could be higher or lower.
Based on “Price curve differences: Yen,” the trade should use a strike price higher than the current futures price. This is true for spreads involving calls on the same currency at different strikes, as well as spreads with different currencies at the same expiration date.