How do continuous futures contracts work?

Discussion in 'Financial Futures' started by Chagi, Sep 26, 2005.

  1. Chagi


    Bit of a new question, but here goes.

    I'm familiar with futures contracts from a textbook perspective, just starting monitoring the Nymex Minis for Crude and Natural Gas. I thought initially that I would need to rotate through the near month contracts as time progressed, but was suprised to see the symbol codes help mentioning the continuous contracts.

    So, my question is, how exactly do these function, and what is their purpose? Is this something that exists purely for the sake of long-term monitoring/charting of the given futures contract (e.g. Crude mini), or does it function the same way as the monthly contracts (i.e. delivery occuring around a particular date for the given month).

  2. hcour

    hcour Guest

    Good explanation of continuous contracts:

    There are several different ways they can be constructed. You pretty much have to decide for yourself how you want to use them and what best suits your needs.

    You might also want to check out the CSI/UA data service demo program for examples of different ways cc's can be created.

  3. Pretty much you get your signals and stops, everything else on the perpetual charts, then use the basis on the actual contracts "closing price," to place your orders.

    CSI says: ÒPerpetual Contract Data can continuously focus on the center of market volume and liquidity, and effectively take the market's pulse over an indefinite period. Unlike nearest future contracts, this computed contract has no abrupt jumps or drops in price. Use this concept to study a market's characteristics over time without concern for contract expiration or the following of complex contract roll-forward rules.Ó
    More from CSI: When creating time-weighted Perpetual Contract data, a time-weighted average is produced using the prices of the contracts that expire before and after the ever-changing date that lies a fixed number of months in the future. This prompt determines how many months ahead that ever-changing date will be.

    Your entry should be greater than or equal to the maximum gap (in months) between successive delivery months for this market. Three months ahead is the usual distance for measuring most commodities, financials and indices, because most have contract expirations at least as often as every two or three months. A two-month forward view of the market may be appropriate for commodities that expire every month or two such as the energy products, live cattle, or hogs and perhaps some precious metals.

    If a commodity has a large gap between successive delivery months, such as Pork Bellies (Aug. to Feb.), the months ahead to view the market should be increased to reflect that gap. Using a value that is less than the maximum gap between successive contracts will result in some portions of the series representing nearest-future data, as opposed to Perpetual Contract data.