Negative Roll Yield commodity futures

Discussion in 'Financial Futures' started by J-S, Feb 25, 2006.

  1. J-S


    Hello Elite Traders,

    I see many commodity futures prices trading contango, and calculate this to be a large expense for futures traders / investors wishing to hold and roll commodities for extended periods (2 years+)

    My question: Is there any way to own commodities without getting crucified by a negatie roll yield? (storage is not an option)

    I realise not all commodities currently trade contango (sugar, copper etc), though the ones that do are becoming very expensive to hold -

    Very grateful for any thoughts.
  2. Surprise, there's no free lunch. If you want exposure to the entire price movement of the physical commodity, trade the physical commodity, don't monkey with futures. This means you'll have the pleasure of delivering, accepting delivery, storing, and insuring the physical product (hogs, oats, whatever). That's the bad news. The good news is, the "negative roll yield" is profit to you (and loss to the poor dumb futures trader).

    Or if you insist on trading futures, there's no free lunch. You can recapture the "negative roll yield" by ... drum roll ... wait for it ... taking risk. You can trade futures spreads as well as outright positions. As long as the "negative roll yield" doesn't shift around too much, you can hedge it away and/or profit from it. But of course there is a risk that it will shift around too much, handing you a loss. Surprise, there's no free lunch.

    Possibly (this link) may be of use to you.

  3. Yes.

    1) trade from the short side. Capture the roll yield
    instead of pay it.

    2) trade markets in backwardation. Oil is often in
    backwardation. (note: can be very dangerous!)

    Is your objective to make money trading or are you
    hedging a physical short position in a particular
  4. J-S


    Thanks for the replies and for the link to Petzels interesting article.

    My objective is to make money holding commodities long only and to do so without getting crucified by a negative roll yield -

    Many of the markets I wish to maintain long only positions in are currently trading contango: Examples Corn, Wheat, Coffee, Cotton etc.

    For example: Spot corn is trading @ 2.125, May 06 corn @ 2.38. You'd need spot corn to rise 12% in just 3 months to break even, or take Dec 06 @ 2.63: 23%+ just to break even....

    I agree with Petzel that commodity index funds are likely causing the increased carry cost. So how will these funds get around negative roll yields - Can they? Are there other derivatives that one can use to circumvent this problem whilst maintaining long only positions? I should point out that I have no room to store the physical commodities.

  5. Call some grain merchants and say "Gosh I wish the futures prices were closer to the spot prices and didn't include such an awful negative roll yield. Will you wager with me on the future price of corn but give me a better deal than the futures exchanges?" Who knows, they might say yes.

    You could also call up professional wagering establishments like casinos and ask whether they take Proposition Bets on the spot price of corn. Maybe they do.

    Or you could find the companies who profit from the negative roll yield, and take a long position in those companies. If long-only commodity funds grow and grow, pushing the roll yield more and more negative, then these companies will receive greater and greater profits.
  6. Well, since this is my first post, I figure I might as well breathe some new life into a dead thread. If someone was going to try to do the roll yield with the E-Minis or E-Micros over on CME (perhaps wheat or natural gas), how much capital do you think one should have in their margin account in case things go to heck in a flash? Also, once you find yourself in a roll yield strategy, how do you exit without potentially taking a huge loss?

    As my username states, I am a newbie...
  7. 1) Instead of calling it "roll yield", call it "carrying charges".
    2) You have to be a little more careful with grains when you "crossover" from old-crop into new-crop.
    3) Funds are that "cause". Physical commodities are more finite(less elastic) than financial commodities.
    4) You could consider selling some call options against futures as a way of offsetting some of the "carry/convergence" against a long-only position.
    5) You could do bull or bear calendar-spreads with futures as a way of offsetting the "excess carry" on the long-leg versus the short-leg.
    6) With longer-dated futures, you can still have a lot of shorter-term, price volatility that can be traded instead of hoping for a smooth and coherent trend that will make you profitable closer to the expiration of the futures. :cool:

  8. Cost of Carry for a stock index is risk free rate - expected dividends. Because rates are now so low relative to dividends the forward contracts are at a discount.

    When you buy a forward contract under these conditions the underlying is paying for your the implied leverage of the position, which is nice.
  9. Stock indexes are a rather nice idea, as is doing the roll yield in a discount/backwardated market as opposed to a premium/contango market, which both natural gas and wheat are now in. Instead of rolling down to converge with short futures and being exposed to an unlimited upside price risk, I could be rolling up to converge with a limited downside risk (i.e. a price of 0). Although, now that natural gas is probably beginning another relatively large climb, this would be a good way to go broke fast in attempting the roll yield with short futures, unless I had allocated quite a bit of capital towards it (like two or three times the present value of the E-Mini natural gas contract, which would be about $20K to $30K, to keep my shorts MTM for a long period of time, presuming this present increase does NOT top the one back in ’08, which it probably will, considering I wouldn’t want it to - lol). I suppose I could buy deep OTM long calls on long futures in the deep deferred months on the standard sized Henry Hub natural gas futures, and simply hold them until the market reaches the strikes to hedge my margin requirements (and pick up a nice lil’ windfall on the side) on the E-Mini short futures.

    Although stock indexes are indeed a far better deal as far as risk management is concerned, I’m really more interested in attempting the roll yield in a contract market that has the largest possible basis differential. Does anyone know of a market that is presently (and historically) backwardated/discounted that has a basis differential as wide as wheat or natural gas, in agricultural, financial or industrial commodities? If so, please let me know, so that I can look into it. Thanks in advance! :cool:
  10. Crud :eek: I just now realized this is the financial futures section. Well, live and learn...
    #10     Apr 1, 2011