Hi, Been confused on the calender spread. a oil trader told me once that short the spread (ie short near month and long the deferred month), during the backwardation with strong fundamental and getting stronger the near month will drop further. thus making profit out of it. anyone can share your thoughts, thanks!
I would have said the contrary, but I don't know... The front month is the most volatile, normally a backwardation implies strong demand vs supply, prices rising and hence front month moving higher faster than deferreds. If your are short front/long back in that environment, you lose.
sorry, mine badly written. there is actually 2 legs of trades. below is just an example on ICE Brent On 1st Mar Sold Apr @ 118.15 Bought May @ 117.25 On 15th Mar Bought Apr @ 109.47 Sold May @ 109.34 For Apr, the gain is 8.68 For May, loss is -7.91 now the diff is 0.77, n that is the profit. PS: long the spread is actually sell prompt n buy the deffered. heard another way of trade is to buy flat price. from surface i think is just speculative.