When you do spreads, how do you handle expiration?

Discussion in 'Energy Futures' started by mizhael, Apr 27, 2010.

  1. Good day!

    Let's say you do a calendar spread,
    when one of the leg futures goes to expiration,
    do you roll that futures into the next contract,
    but which contract do you roll it to?

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    Please kindly give me some pointers about how the spreads work...

    Conceptually it's clear to me,

    however, I am just not sure about the operational details about rolling the legs...

    ----------------

    I would like to backtest trading spreads,

    anybody shed some lights on this?

    Thanks a lot!
     
  2. roll it to whatever you want to roll it to: if you are trading m/n in crude and u are long m/n just sell m buy 2 n and sell q (futures butterfly) if that is indeed what you want to do...

    you might not want to be long n/q though so it really depends...you might want to be short n/q so in that case you would just sell out your m and buy q...

    just do the inverse of what you did to put it on...

    I wouldn't leg in and out of crude outrights though might better done through spreads themselves.

    don't know much about backtesting for spreads other than that seasonality tends to work a lot depending on what spread and time of the year. Encyclopedia of commodity and financial Spreads is a good place to start for that...
     
  3. Thanks a lot!

    When you do back-test, let's say we are doing a Crude/BRENT spread,

    they don't expire at the same time.

    what shall I do?

    Of course we can define a roll-date to roll them both at the same time,

    but when we roll, how do we handle those cash in-and-out due to rolling, in back-test?
     
  4. roll to the next month once the first one expires, not sure how many days apart that is...
     
  5. so you would like to maintain the same month of the pair?
     
  6. You can do what you want. That type of inter-market calendar-spread can become more volatile if the months become more separated, i.e. June/June can be less volatile than June/September, unless you're aware of fundamental quirks within certain months. :cool:
     
  7. Thanks but I am talking about inter-commodity spreads...