Thanks Mav ... the near month is, in effect, the spot month in the traditional definition backwardation and contango. This example is for calendar spreads. Does the concept apply for butterflys and condors? I'd think not.
Of course it does - it applies to most any fungible commodity intramarket forward curve - especially where there is a storage and transportation basis component. Hint: Look at the complete settlement sheet (all months) for CL - all the months. Look at the plotted pricing forward curve shape.
Ok, with a calendar spread of Leg1 - Leg2 where Leg1 is nearest month then the definition of backwardation and contango you stated makes perfect sense. If a fly is (Leg1 - (2 * Leg2) + Leg3) then which term(s) are used to compare against one another using the greater-than or less-than relationship to determine if the fly is in backwardation/contango? Seems unusual, at least to me, to refer to a fly/condor using those terms.
Do not butterflies and condors have front and back months in their construction? Again, plot the entire forward curve and then select which segment of that plot and time duration you want to isolate. You can use a calendar pair, a fly, a condor, or strips to make your play / each will have opportunities depending upon a number of factors. In CL, I've personally had on up to 8 different expires on simultaneously. You engineer your opportunity - there's a great deal of dimensionality available for the smart creative types.
Back to my question. With a calendar, at any point in time, I can determine based on the relationship between the two component contracts, whether the spread is in contango or backwardation. If Leg2 > Leg1 then contango (given Leg 1 is front month), etc. With a fly the formula is (Leg1 - (2 * Leg2) + Leg3). So to determine, at a given point in time, if a fly is in contango is the test Leg3 > Leg1? What happens with the 2*Leg2 term? Is it ignored in this test as it's not either the front or back month? Thinking in terms of the relationships between the components of the fly is what I'm trying to wrap my head around. Thanks Bone
In your case IMO overthinking an abstract construct in your mind without the benefit of analytical work is doing you a great disservice. Again, please heed my original advice to plot EACH CL expiry month settled price in the forward curve off of today's settlement sheet from the CME. If you do the work, and then take that effort to the next logical progression to include multiple historical forward curve plot changes over time it will explain everything you truly need to know.
What is the "abstract construct" in this context?. Contango and backwardation are not abstract constructs rather they have a precise calculable definition when relating the spot to a futures price. Mav put forth the precise, 100% objective, definition of a calendar spread being in backwardation or contango at a given point in time. My question had to do with whether such an objective definition could be applied to a fly. It sounded like you said it could - though maybe that's not quite what you said. If there is such a definition using the contracts making up a fly (Leg1 - (2 * Leg2) + Leg3) I'd be curious as to what it is. If the concept of contango and backwardation at a point in time, as applied to a fly, is not 100% objective as in the case of a calendar then that's fine too.
Contango describes the shape of the forward curve. A spread is the tool you use to manipulate it. So whether you use a calendar spread or a butter fly or a condor, those are tools you use to trade the curve. For example, a curve might be in contango on the first 6 months but may flatten on months 6 to 12 and may then go into backwardation 12 months and further out. A good example of this is natural gas. Natty is usually backwardated in the winter and in contango in the summer. You can put on spreads that try express your view of how those curves will change over time. Hopefully that makes sense.
When you say "Natty is usually backwardated in the winter and in contango in the summer" does not pertain to a particular contract at a particular point in time? For example might it be possible that NGV17 is in contango today and NGZ17 is in backwardation today based on the relationship between today's price and the spot price. I'm probably be a bit nit picky, and this is really just a "am curious" question, but am just trying to understand if a specific contract being in contango/backwardation at a given point in time is a 100% objective measurement based on it's relationship to some other contract (usually the spot month).
Forget about contracts. Think of it more in terms of continuous time. There is a settlement price every single day starting with spot, then spot +1, spot +2, etc. There are many energy markets that don't even have futures, its all OTC and they settle on daily benchmark pricing. Just think of prices in terms of daily settlements. The futures market is just one particular price at one particular time.