How come I would be a bit short? If I go 10 contracts short Jan and 10 contracts long Feb isn't the net position 0?
@Wheezooo Sorry to call you out - I thought you might have missed my question in post #21 - would be grateful if you could explain your reasoning
I saw it. I wanted to see if you would invest time to figure it out for yourself. But here's a clue. Backwardation and contango.
Well, I know about contango and backwardation but that is unpredictable. It can shift from one to the other any time - that is the risk involved with this strategy. Is there any way to reduce it?
Think about the curve like a diving board. The front of the curve (Where the diver jumps off) moves much more than the back of the diving board. Therefore even though you are notional neutral (short 1 contract, long 1 contract) the short leg (front of the diving board) will move more than the back leg.
Is it safer to execute this strategy using further-dated CL futures? They are much less liquid - that is another concern. Do you have any other suggestions as to the choice of CL contracts and direction of each leg?
Depends on your intent.... In either case futures trading revenue will be marked to market at the end of the year. If you are asking from a trading standpoint then yes the volatility between serial months is more comparable on deferred contracts. You will generally find more liquidity on the June and Dec contracts. I can't speak to trading strategy, that's something you would need to research/test to determine if there is positive expectancy.
Again, in my tax jurisdiction futures will NOT be market to market at the end of the tax year. Do you mean the potential for a big move in spread between the deferred contracts is smaller than in near months?