Daily-return correlation of 12 contemporaneous spreads (2022). Adjacent spreads run ~0.85+ together; distant ones decouple. This is exactly why a butterfly (+1 / −2 / +1) cancels the shared level and isolates pure curvature — the cheapest, lowest-margin way to trade shape. Hover any cell.
PCA of any futures curve collapses to three orthogonal moves that explain >95% of variance:
Because adjacent spreads correlate so tightly (our 2022 set: ρ ≈ 0.88 adjacent), a fly's net exposure to LEVEL and SLOPE ≈ 0 — you hold the cleanest signal on the curve. SPAN's inter-month credits then margin it at ~10× less capital than an outright.
Adjacent month-pairs share the same storage economics and convenience yield, so they move near-lockstep. Push the tenors apart and the link decays roughly exponentially — distant spreads answer to different parts of the curve.
The two legs of a spread are cointegrated — they wander, but not apart. That's what makes the spread itself stationary-ish and mean-reverting. Engle-Granger / Johansen formalise it; OU models the reversion.
In April 2020 the tidy correlation structure shattered — a physical storage squeeze, not a statistical wiggle. Any model calibrated on calm history had no signal. Risk overlays (inventory, hard stops) are non-negotiable.