Understanding Rolling Forward

Discussion in 'Financial Futures' started by markcuban, Jul 11, 2006.

  1. I am new to futures - so please be gentle...

    I want to know how to calculate the cost/risk associated with rolling a front contract month to month.

    How does it work? ie i buy qg for 5.60 today. at end of month - to roll forward - i pay:

    1. commission - fine
    2. differential between front and next month? how do you account for this ie - how can you factor this in to your cost?? who decides what the spread is? I don't get it

    any insight would be greatly appreciated


  2. Pabst


    Most spreads in futures are reflective of "cost of carry". Think of things like indices, debt instruments, FX, even metals which are really uber-paper. Physical commodities are much more complex. Some items can't be "stored" very long, i.e. livestock so there can be instances where spreads are extremely wide. I'm not an energy trader so other than the obvious seasonal tendency (colder weather) I don't know the reasons why QG (e-mini natural gas) is almost double in price next winter. Apparently NG cannot be stored at all, or at least be stored cheaply, because that's one WIDE spread! (August is in the mid 5's, next Jan is in the mid-10's).

    I'd start a new thread, titled "NYMEX NATURAL GAS SPREAD".

    Then ask your question and ask for explanation on the pricing pressures between disparate months. I'm curious also!
  3. "they" think there won't be enough supply when winter actually comes to meet demand,right now anyway.if they start thinking that this winter will be mild then that jan contract should start coming down.
    here is a link about storage if you are interested:

  4. sorry - my question is even more basic.

    rolling month to month

    how much does it cost? how do you calculate that cost in advance to know your risk?

    ie - i want to hold qg for a year? current price is 5.50. ignoring commission - how much is this going to cost me?
  5. 1. Commissions on buying one contract and selling the other contract

    2. The spread, which is about the same as the spread for trading the front contract if you roll around the time open interest switches.
  6. thanks equity guy - could you please elaborate a it on #2?

    thanks again
  7. Pabst


    There must be something I'm missing. If NG can be stored indefinitely, why not take delivery of August at 5.50 and re-deliver in January at 10.50? There's no way that "normal" carrying charges, i.e. transportation, storage and interest would equal anything more than several percent of that spread differential.
  8. Bid/ask spread
  9. PABST----You deserve a "blue ribbon". I've only been preoccupied with the front month of the natural gas contract. I wasn't aware of what's going on in the winter months. "It" might have something to do with contract specifications, delivery quirks, weather models or who knows what. I wonder if I can lock in today's prices through the winter with one of those pesky gas marketing companies? Thanks for the heads-up.
  10. lotsa luck finding a broker to allow you to take delivery and store the stuff...

    remember that there is an enormous conspiracy called global warming intended to flatten out nat gas consumption and end your commie plot called arbitrage ( a French word of all things )
    #10     Jul 11, 2006