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? --------------- 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!
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...
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?
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.