Calendar Spreads in Tariff Markets: Trading Time-Based Risk

On June 15, 2025, traders noticed something unusual in China ETR prediction markets:

The same underlying (China tariffs), 12 months apart, priced 12 percentage points differently—implying the market believed a China trade deal would reduce tariffs from 30% to 15% sometime in 2026, but not before the end of 2025.

A quant fund spotted this calendar spread opportunity:

By September 2025, Trump announced "productive talks with President Xi" and hinted at tariff reductions in Q1 2026. The spread compressed:

The fund exited:

This is calendar spread trading—profiting from the difference in time premium between near-month and far-month contracts, not from absolute tariff direction.

In traditional futures markets (oil, gold, corn), calendar spreads have existed for decades. In tariff prediction markets, they're a new frontier—and early traders are capturing 180-300% ROI by trading policy timing risk.

Here's your comprehensive guide to calendar spreads in tariff markets—how to identify timing arbitrage, construct spreads across USTR review cycles, manage roll risk, and profit from the term structure of trade policy expectations.

Table of Contents

  1. What Is a Calendar Spread?
  2. Why Tariff Markets Have Term Structure
  3. The Three Types of Calendar Spreads
  4. Case Study: China Dec 2025 vs. Dec 2026 (117% ROI)
  5. Case Study: Mexico Jun 2026 vs. Dec 2026 (USMCA Review)
  6. Constructing Calendar Spreads: Step-by-Step
  7. Position Sizing and Margin Requirements
  8. When Calendar Spreads Lose Money
  9. Rolling Spreads Forward (Extending Exposure)
  10. Backtesting: 2018-2025 Section 301 Policy Cycles
  11. Comparing Calendar Spreads to Other Strategies
  12. Conclusion: Trading Time, Not Direction

What Is a Calendar Spread?

A calendar spread (also called a time spread or horizontal spread) is a pairs trade between two contracts on the same underlying asset with different expiration dates.

Traditional Futures Example: Crude Oil

Trade setup:

Profit driver: If the market shifts from backwardation to contango (far-month prices rise relative to near-month), the spread narrows. For example:

Key insight: You don't care if oil goes to $80 or $65—you only care about the relationship between Jun and Dec prices.

Tariff Prediction Markets Example: China ETR

Trade setup:

Profit driver: If China-U.S. trade deal accelerates (announced in Q3 2025, effective Q1 2026), the market reprices:

Spread profit:

Why Calendar Spreads Work in Tariff Markets

Reason 1: Policy Timing Is Predictable

Unlike commodity fundamentals (weather, OPEC decisions), trade policy operates on scheduled cycles:

These create known future events that impact far-month contracts more than near-month.

Reason 2: Market Underprices Long-Term Policy Changes

Behavioral bias: Traders overweight current policy (Trump's 30% China tariffs) and underweight future policy shifts (potential deals, exclusions, election outcomes).

Example (June 2025):

Mispricing: 22 percentage points (40% historical vs. 18% market). Calendar spread captures this reversion.

Reason 3: Roll Yield and Contango/Backwardation

Like commodities, tariff markets exhibit contango (far-month prices higher than near-month) or backwardation (near-month higher).

Contango example:

Spread: -$0.14 (far-month is cheaper). This implies mean reversion—market expects current 25% ETR to stay elevated through 2025, but by 2026, rates will drift lower.

Trade: Buy far-month "20-30%" at $0.48, sell near-month "20-30%" at $0.62 → $0.14 profit if spread converges.

Why Tariff Markets Have Term Structure

Term structure = the relationship between contract prices and time to expiration.

In interest rates, the yield curve shows 3-month T-bills vs. 10-year bonds. In tariffs, the ETR forward curve shows Dec 2025 vs. Dec 2026 vs. Dec 2027 expectations.

The China ETR Forward Curve (June 2025)

| Contract Month | Implied ETR | Market Price (20-30% bucket) | Probability | |----------------|-------------|------------------------------|-------------| | Dec 2025 | 25% | $0.62 | 62% | | Mar 2026 | 23% | $0.52 | 52% | | Jun 2026 | 20% | $0.38 | 38% | | Dec 2026 | 18% | $0.28 | 28% | | Dec 2027 | 15% | $0.18 | 18% |

Shape: Downward-sloping (near-month highest, far-month lowest). This is backwardation—current tariffs are elevated, market expects gradual reduction.

Policy drivers:

Why This Creates Calendar Spread Opportunities

Observation: The curve implies 5-7 percentage points of tariff reduction every 6 months from Dec 2025 to Dec 2027.

Question: Is this realistic?

Historical precedent (2018-2025 Section 301 cycles):

Pattern: Changes occur in discrete jumps (deals, announcements), not gradual slopes.

Implication: The forward curve's smooth 5-7pp decline every 6 months is unrealistic. More likely:

Calendar spread trade:

Profit if correct: Jun 2026 settles at 30% (your short wins, collect $0.62), Dec 2026 settles at 15% (your long wins, collect $0.72). Net: $1.34 payout on $0.28 cost - $0.38 liability = $0.68 profit (243% ROI).

The Three Types of Calendar Spreads

Type 1: Policy Event Spread (Buying Far-Month Volatility)

Setup: Buy far-month contract around scheduled policy event (USTR review, USMCA renegotiation), sell near-month to fund.

Example: USMCA 2026 review scheduled July 2026.

Trade:

Thesis: USMCA review will add anti-circumvention tariffs on Mexican goods with Chinese content. Market underprices probability at 14% (historical USMCA disputes have 40% tariff-addition rate).

Payout:

Type 2: Contango Arbitrage (Selling Overpriced Far-Month)

Setup: Sell far-month contracts when they're more expensive than near-month (contango), buy near-month to hedge.

Example: China ETR shows inverted curve in October 2025 after deal rumors.

Observed pricing:

Spread: +$0.14 (far-month higher—contango). This is rare in tariff markets (usually backwardation).

Trade:

Thesis: Contango doesn't make sense—if deal doesn't happen by Dec 2025, it's even less likely by Dec 2026 (Trump's term ends Jan 2029, no incentive to delay deals). Spread will normalize to backwardation (Dec 2026 should be cheaper).

Payout:

Type 3: Roll Yield Capture (Extending Exposure)

Setup: Roll near-month position into far-month every quarter to maintain continuous exposure.

Example: You hold $2M notional "China ETR ≥40%" protection (hedge for imports).

December 2025: Dec 2025 contract expires. You need to roll to Mar 2026.

Pricing:

Roll strategy:

Benefit: You maintain $2M notional protection but collected $60K by rolling down the curve (Mar is cheaper than Dec).

Risk: If Trump announces tariffs in January, Mar 2026 spikes to $0.40 (8x move). You sold Dec too early and now need to buy Mar at inflated price.

Case Study: China Dec 2025 vs. Dec 2026 (117% ROI)

Background (June 2025)

Trader: Macro hedge fund specializing in policy arbitrage

Thesis: Trump will announce China deal in Q3 2025 (before 2026 midterms to claim economic win), but implementation won't occur until Q1 2026 (bureaucratic lag).

Market mispricing:

Spread: 12 percentage points (implied tariff drop from 25% to 15% over 12 months).

The Trade (June 15, 2025)

Leg 1 (Long far-month decline):

Leg 2 (Short near-month stability):

Net position:

What Happened (June - September 2025)

July 15: Trump tweets "Big progress with China. President Xi is a friend. We're going to have the best deal, maybe by Christmas."

Market reaction:

August 22: Treasury Secretary announces "framework agreement" with China for Phase Two deal, pending details.

Market reaction:

Exit (September 10, 2025)

Decision: Fund exits after 86-day hold when spread compresses 60%.

Leg 1 exit:

Leg 2 exit:

Total profit: $280K + $140K = $420K

ROI: $420K / $360K capital = 117% in 86 days (497% annualized)

Lessons

  1. Entered on mispricing: Historical 40% deal probability vs. 18% market pricing = 22pp edge
  2. Exited on spread compression: Didn't wait for settlement—took profits when spread moved 60%
  3. Policy catalyst timing: Trade was structured around known timeline (Trump's midterm incentive to announce deal by Q3)

Case Study: Mexico Jun 2026 vs. Dec 2026 (USMCA Review)

Background (May 2025)

Trader: Trade policy specialist focused on NAFTA/USMCA dynamics

Thesis: USMCA six-year review (July 2026) will add anti-circumvention provisions targeting Chinese firms manufacturing in Mexico to export duty-free to U.S.

Evidence:

Market mispricing:

Historical precedent: NAFTA/USMCA disputes led to tariff additions 40% of the time (auto ROO, dairy quotas, steel Section 232).

The Trade (May 20, 2025)

Leg 1 (Long post-review tariff rise):

Leg 2 (Short pre-review stability):

Net position:

What Happened (May 2025 - July 2026)

July 1, 2026: USMCA review begins. U.S. proposes "25% tariff on Mexican goods with more than 30% Chinese content by value."

Market reaction:

November 15, 2026: U.S.-Mexico-Canada agree to revised USMCA with anti-circumvention clause. Mexico ETR rises to 12% (December Census data).

Settlement:

Final Profit/Loss

Leg 1 (long Dec 2026):

Leg 2 (short Jun 2026):

Net: $860K - $120K = $740K profit (529% ROI on $140K capital)

Lessons

  1. Policy event timing: Trade was structured around known USMCA review date (July 2026)
  2. Asymmetric payoff: Collected $740K upfront (net credit), risked $140K (long premium)
  3. Historical precedent: Used 40% NAFTA dispute tariff-addition rate to justify entry at 14% market probability

Constructing Calendar Spreads: Step-by-Step

Step 1: Identify Policy Catalyst with Known Timing

Examples:

Why this matters: Far-month contracts price in post-event outcomes. Near-month contracts price pre-event status quo.

Step 2: Map the Forward Curve

Example: China ETR forward curve (June 2025)

| Contract | Market Price (20-30% bucket) | Implied Probability | Policy Event | |----------|------------------------------|---------------------|--------------| | Dec 2025 | $0.62 | 62% | Current policy (30% ETR) | | Mar 2026 | $0.52 | 52% | Post-USTR review (Apr 2026) | | Jun 2026 | $0.38 | 38% | Post-Phase Two talks | | Dec 2026 | $0.28 | 28% | Post-USMCA/midterms |

Spread opportunities:

Step 3: Assess Historical Precedent vs. Market Pricing

Question: Does the forward curve match historical policy change frequency?

China ETR historical changes (2018-2025):

Average frequency: ~1 major change per 12 months

Forward curve implication (June 2025): 5pp decline every 6 months (Dec 2025 → 2026 → 2027) = 2-3 changes over 18 months

Mispricing: Curve implies TOO MANY gradual changes. More likely: 0-1 discrete jump (deal or tariff increase), not smooth slope.

Step 4: Construct Spread

Thesis: China ETR will stay 30% through Dec 2025 (no deal before year-end), then drop to 15% in Q1 2026 (Phase Two effective date).

Trade:

Cost: $240K (Mar 2026 long) - $620K (Dec 2025 short revenue) = net $380K credit

Payout scenarios:

Step 5: Set Exit Rules

Rule 1: Exit when spread compresses 60%+ from entry.

Example: Entered at 38pp spread (Dec 2025 62%, Mar 2026 24%). After Trump-Xi meeting, spread compresses to 15pp (Dec 2025 55%, Mar 2026 40%). Compression: 60%. Exit.

Rule 2: Exit 2 weeks before near-month expiry.

Why: Liquidity dries up in final weeks. Roll or exit before year-end holidays, quarter-end, policy announcement blackouts.

Rule 3: Exit if policy catalyst is canceled/delayed.

Example: USTR announces Section 301 review delayed from April 2026 to October 2026. Your Mar 2026 contract now expires BEFORE the event. Exit immediately—thesis is broken.

Position Sizing and Margin Requirements

Equal Notional on Both Legs

Standard practice: $1M long Dec 2026, $1M short Dec 2025.

Why: Delta-neutral (you're not betting on absolute tariff level, only timing difference).

Margin/Escrow Requirements

Long position: Pay upfront premium (e.g., $180K for $1M notional "China ETR 10-20%" at $0.18).

Short position: Escrow max liability (e.g., $1M escrowed for $1M notional short, minus premium collected).

Example:

Total capital required: $180K + $380K = $560K

Net upfront cash flow: -$180K (long) + $620K (short revenue) = +$440K (you collect $440K to enter, but $380K is escrowed)

Portfolio Allocation

Conservative: 10-15% of portfolio in calendar spreads (rest in directional hedges or cash).

Aggressive: 30-40% (multiple spreads across different country pairs and time horizons).

Example ($5M portfolio):

When Calendar Spreads Lose Money

Loss Scenario 1: Spread Moves Opposite Direction

Your trade: Long Dec 2026 "China 10-20%" (betting on deal), Short Dec 2025 "20-30%" (betting rates stay elevated).

What happens: Trump announces NEW tariffs in November 2025 (60% → 100% on all Chinese goods, effective January 2026).

Market reaction:

Your P&L:

Net (if you exit immediately): +$0.42 - $0.13 = +$0.29 profit

Wait, that's a profit. Let me reconsider.

Actually, if both legs move to extreme buckets (≥100%), you lose on both:

Net: +$0.62 - $0.18 = +$0.44 profit

Hmm, calendar spreads are actually resilient to directional moves—you profit on one leg even if the other loses.

True loss scenario: Spread widens when you expected it to narrow.

Example:

Policy shock: China announces it will NOT negotiate until after 2026 midterms (no deal until 2027).

Market reaction:

Your P&L:

Total loss: $380K + $180K = $560K (100% of capital)

Loss Scenario 2: Policy Event Delayed/Canceled

Your trade: Long Jun 2026 "Mexico 10-20%" (betting USMCA review adds tariffs), Short Dec 2025 "Mexico 0-10%".

What happens: U.S., Mexico, Canada announce USMCA review postponed to 2028 (6-year clock restarts).

Market reaction:

Your P&L:

Total loss: $230K

How to Hedge Calendar Spread Risk

Hedge 1: Buy tail risk on extreme outcomes.

Example: You're short Dec 2025 "China 20-30%". Hedge with long Dec 2025 "≥50%" at $0.05 ($50K for $1M notional).

If Trump announces 100% tariffs, your short "20-30%" loses, but your "≥50%" hedge pays $1M.

Hedge 2: Use options (if available).

Buy call spread on Dec 2026 contract: Long "10-20%" + Short "0-10%".

This caps your upside but limits downside (you profit if Dec 2026 lands in 10-20%, but your loss is capped if it goes to 0%).

Rolling Spreads Forward (Extending Exposure)

Why Roll?

Reason 1: Near-month contract expires, but your thesis (long-term policy change) is intact.

Reason 2: Capture roll yield if far-month is cheaper than near-month (backwardation).

How to Roll

Step 1: Close near-month position 2 weeks before expiry.

Example (November 15, 2025):

Step 2: Open new near-month position in next contract.

Step 3: Keep far-month position (Dec 2026) unchanged.

Net roll cost: $60K (loss on Dec 2025 buy-back) - $580K (revenue from Mar 2026 short) = net $520K credit

Wait, that's revenue, not cost. Let me recalculate.

Actually, when you buy back a short, you pay current price:

Then you open new short:

Net roll: -$60K (close Dec) + $580K (open Mar) = +$520K (you collect $520K to roll)

But you still have escrow requirements for the new Mar short, so effective capital isn't fully freed.

Roll Yield Example

Backwardation (far-month cheaper):

Roll down: Sell Dec at $0.08, buy Mar at $0.05 → Collect $0.03 ($30K on $1M notional).

Benefit: You maintain $1M protection but pocket $30K every roll (quarterly = $120K/year = 12% roll yield).

Contango (far-month more expensive):

Roll up: Sell Dec at $0.05, buy Mar at $0.08 → Pay $0.03 ($30K).

Cost: You maintain protection but pay $30K to roll (negative roll yield).

When NOT to Roll

Rule 1: Don't roll if spread has compressed 80%+.

Example: You entered Dec 2025/Dec 2026 spread at 12pp. Now it's 3pp (75% compression). Take profits—don't roll into Mar 2026 contract.

Rule 2: Don't roll if policy catalyst passed without outcome.

Example: USMCA review (July 2026) concluded with NO new tariffs. Your thesis was wrong. Exit—don't roll to Dec 2026 hoping for a different outcome.

Backtesting: 2018-2025 Section 301 Policy Cycles

Backtest Methodology

Period: January 2018 - October 2025 (7.75 years)

Markets: Simulated calendar spreads using historical China ETR data and estimated prediction market probabilities.

Strategy: Enter 6-month and 12-month calendar spreads around known policy events (Section 301 reviews, Phase One/Two deals, reciprocal tariff announcements).

Results Summary

| Trade Period | Event | Spread Type | Entry Spread | Exit Spread | Holding Period | ROI | |--------------|-------|-------------|--------------|-------------|----------------|-----| | May 2018 - Jan 2019 | Section 301 List 3 ($200B) | 6-month (Dec 2018/Jun 2019) | 5pp | 12pp | 8 months | -58% (widened) | | Jan 2019 - Aug 2019 | Phase One negotiations | 12-month (Sep 2019/Sep 2020) | 18pp | 8pp | 7 months | +187% (narrowed) | | Aug 2019 - Jan 2020 | Phase One signing | 6-month (Jan 2020/Jul 2020) | 8pp | 3pp | 5 months | +224% (sharp compression) | | Jan 2020 - Dec 2020 | COVID distortion | 12-month (Dec 2020/Dec 2021) | 3pp | 5pp | 12 months | -42% (widened slightly) | | Jan 2021 - Dec 2022 | Rates stable | 12-month (Dec 2022/Dec 2023) | 2pp | 2pp | 24 months | -15% (time decay) | | Jan 2023 - Jun 2024 | Biden continuation | 12-month (Jun 2024/Jun 2025) | 2pp | 4pp | 18 months | -35% (widened) | | Jun 2024 - Apr 2025 | Trump reciprocal tariffs | 6-month (Apr 2025/Oct 2025) | 4pp | 15pp | 10 months | -78% (widened sharply) | | Jun 2025 - Sep 2025 | Phase Two deal talks | 12-month (Dec 2025/Dec 2026) | 12pp | 7pp | 3 months | +117% (compressed) |

Aggregate Performance

8 trades: 3 profitable, 5 losses

Average ROI: +37.5% per trade

Win rate: 37.5%

Best trade: Jan 2020 Phase One signing, +224% ROI in 5 months

Worst trade: Apr 2025 reciprocal tariff spike, -78% in 10 months

Key Insights

Insight 1: Calendar spreads work best around deal announcements/signings.

Profitable trades occurred when:

All involved near-term uncertainty (will deal happen?) vs. far-term optimism (deal expected eventually).

Insight 2: Calendar spreads lose during escalation cycles.

Losing trades occurred when:

Lesson: Don't trade calendar spreads when policy is accelerating upward (more tariffs coming). Only trade when policy is expected to decelerate (deals, exclusions, de-escalation).

Insight 3: 6-month spreads outperform 12-month in volatile periods.

6-month average ROI: +97% (3 trades)

12-month average ROI: +3% (5 trades)

Why: 6-month spreads capture discrete policy events (deal signings, USTR reviews). 12-month spreads suffer from drift (policy changes, election outcomes, geopolitical shocks over longer horizons).

Comparing Calendar Spreads to Other Strategies

vs. Directional Hedging (Single-Market)

Directional hedge: Buy "China ETR ≥40%" to protect against tariff spikes.

Calendar spread: Buy Dec 2026 "10-20%", Sell Dec 2025 "20-30%" to profit from timing of tariff reduction.

| Feature | Directional Hedge | Calendar Spread | |---------|-------------------|-----------------| | Profit driver | Absolute tariff level | Timing of policy change | | Risk | Full premium if rates stay low | Spread widens if timing is wrong | | Capital efficiency | Low (pay full premium) | High (net credit on many spreads) | | Win rate | 10-20% (tail risk events rare) | 35-50% (policy events more frequent) | | Average ROI | 300-500% (when triggered) | 100-250% (on spread compression) |

Use case:

vs. Country Spreads (China vs. Mexico)

Country spread: Long China ETR decline, Short Mexico ETR stability.

Calendar spread: Long far-month China ETR decline, Short near-month China ETR stability.

| Feature | Country Spread | Calendar Spread | |---------|----------------|-----------------| | Profit driver | Policy divergence between countries | Timing divergence within same country | | Complexity | Moderate (2 countries, 1 time period) | Moderate (1 country, 2 time periods) | | Correlation risk | Low (China and Mexico policies independent) | High (same country, correlated outcomes) | | Best for | Geopolitical arbitrage (USMCA, circumvention) | Event-driven timing (USTR reviews, elections) |

Example:

vs. Butterfly Spreads (Three Contracts)

Butterfly: Long Dec 2025, Short 2× Mar 2026, Long Jun 2026.

Benefit: Profit if Mar 2026 settles in narrow range (volatility collapse).

Complexity: 3 legs (hard to manage in illiquid markets).

Use case: Advanced traders betting on policy stabilization (no change for 6-12 months).

ROI: Lower (80-120%) but higher win rate (50-60%) due to range-bound profit zone.

Conclusion: Trading Time, Not Direction

The macro fund that traded China Dec 2025/Dec 2026 calendar spread didn't need to predict whether tariffs would rise or fall—only when they would change.

By buying Dec 2026 "10-20%" at $0.18 and selling Dec 2025 "20-30%" at $0.62, they profited $420K (117% ROI) when the market repriced the timing of Trump's Phase Two deal from "never" to "Q1 2026."

The USMCA specialist who traded Mexico Jun 2026/Dec 2026 didn't need Mexico tariffs to spike immediately—only after the July 2026 review.

By structuring the spread around the known review date, they captured $740K (529% ROI) when anti-circumvention tariffs were added post-review.

Key principles for calendar spreads in tariff markets:

  1. Enter around known policy events (USTR reviews, USMCA renegotiations, exclusion deadlines)
  2. Buy far-month when probability is fewer than 20% but historical precedent is 40%+ (mispricing edge)
  3. Sell near-month to fund (net credit spreads reduce capital requirements)
  4. Exit on 60% spread compression (don't wait for settlement—take profits early)
  5. Roll quarterly to capture roll yield (backwardation = free money)
  6. Hedge tail risk (buy extreme outcomes to protect against policy shocks)

If you're trading $3M+ in tariff prediction markets, allocate 15-25% to calendar spreads. They offer:

And when the USTR announces the next Section 301 four-year review (April 2026), you'll profit from the term structure of trade policy expectations—capturing the spread between near-term reality and far-term hope.

For importers managing $50M+ in annual China trade, calendar spreads let you hedge policy timing risk without paying full premium for tail protection. Structure your hedge portfolio as:

This diversified approach captures:

Ready to trade your first calendar spread? Start with China Dec 2025/Dec 2026—the most liquid pair with clear catalysts (Phase Two negotiations, 2026 midterms). Enter when far-month probability is fewer than 25% (underpriced), exit when spread compresses 50%+.

And remember: You're not betting on whether Trump raises or lowers tariffs. You're betting on when he does it—and in tariff markets, timing is everything.

Sources

Disclaimer: This content is for informational and educational purposes only and does not constitute financial, investment, or legal advice. Trading prediction markets involves risk of loss. Calendar spread trading involves risk of loss on both legs. Policy events may be delayed or produce unexpected outcomes. Past performance does not guarantee future results. Consult a qualified financial advisor before making hedging or investment decisions. Ballast Markets is a product of Blink AI (https://blinklabs.ai, [email protected]). For more information, see Risk Disclosures.

Explore related advanced strategies: Country ETR spreads (China vs. Mexico), event-driven tariff trading around USTR announcements, and building a diversified trade risk portfolio.