Greetings, If I am interested in opening a long term futures position what are my choices? Open the front month and keep rolling over the contracts ? (rollovers cost money) Open the furthest out contract available at the time of opening the trade ? And just out of curiosity, are there any continuous contracts available in any futures market ? (So in the case of a long term hold no need to rollover...) That would be ideal, wouldn't it ? Aprreciate any ideas. Thanks !!
There are not long term exchange traded continuous futures contracts as that would defeat the purpose of a futures contract. If going long a long dated futures contract and holding it for many months, you would be paying for the cost of carry -- likely more than the cost of rolling. Another strategy is to sell a long dated futures contract to collect the cost of carry, but that is a strategy for those who completely understand how futures and options on futures work. Commerical hedgers who actually own the physical, for example, may often do that. Futures trading and how the contracts work cannot be confused with investing in the underlying. Futures have a different economic purpose than equities.
Thank you. Here is the hypothetical. I want to go long CC (cocoa) and hold the position for a period of 12 months. Months available at this time: CCZ05 CCH06 CCK06 CCN06 CCU06 CCZ06 CCH07 CCK07 CCN07 I would buy the CCZ06 so I don't have to roll over contracts. Is this correct ? You say it is more expensive to carry than to roll over ? How much do I have to pay to carry a contract, I had no idea you had to pay anything to hold a futures contract short or long. ************* In some futures long dated contracts I see no OI but the contract is being offered so I can still establish my position as long a the contract is offered? This seems to simple to be true. I feel I am missing something. I know lack of liquidity is an issue, but I am a long term holder. Any comments would be very appreciated. Thanks.
Carry is included into the futures price, that is the difference between future and spot prices. The further the expiration the higher the carry paid "upfront".
Thank you atorchio ! In the case of a long term hold, (2years) do you know if it is cheaper the buy the front month and rollover or buy the furthest out to start with ? Or does it depend on the future itself and present prices ? Thank you very much for any ideas or help !
Carrying charges are the cost of insurance, storage, etc. like storing grain in an elevator, keeping the grain dry etc. carrying charges disipate as the contracts time disapears to expiration. Thus a hedger can sell a forward contract and deliver the "ACTUALS" and collect the carrying charges as the short contracts lost value and he was protected from price decay of the actuals if indeed he had them in hand when he agreed to a forward sale at a certain date. Thus the "REAL" economic need of the futures mkts. Non-storable is different, there are no carrying charges. The oil mkt has lower forward prices as an example.
Good post bighog. Also to consider, Optionpro, the theoretical 'cost of carry' includes the fact that you are tieing your money up (should you go long like you are saying) in a contract that wont turn into the physical underlying commodity for a long time. This doesn't mean that nobody will trade that contract but the odds are that more end users i.e. people who actually want the cocoa, than speculators like yourself will be trading the thing. This may not quite be the case so much with commodities but it certainly would be for any index/bond futures, but I reckon liquidity may still be limited compared to near-dated contracts. If you want something that is going to jump around a lot through desperation and speculation, a contract in the near term would possibly be better. However, I see the merit in your theory but I'm not necessarily sure this is the best way to go about it. I personally wouldn't know how you would calculate 'fair value' that far ahead (taking into account NPV, inflation expectations, opportunity cost of holding the contract, liquidity of the contract blah blah blah) so I'd appreciate it if someone came up with arguments for this as it's an interesting subject.
Personally, I always buy the most active and roll as needed. Yes, you will pay transaction costs for the rollover, but I've found that the execution risk of trading furthur out contracts to be much greater than rollover costs. I do have a couple of exceptions: 1) If I am establishing a position and I know I would end up rolling that position in a week or so, I'll just establish a position in the later contract. 2) Things like CL - these you will roll every month and that can add up. I'll often skip a month - there is enough liquidity in CL to allow you to do that. I should point out that I always establish positions and roll on the basis of highest OI - some contract months get skipped because they are lightly traded (the metals are examples of this).