35 lines
2.3 KiB
Plaintext
35 lines
2.3 KiB
Plaintext
Chapter 35: Futures Option Strategies for Futures Spreads 697
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ical commodity until futures expiration. However, other factors may enter in as well,
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including supply and demand considerations. In a normal carrying cost market,
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futures that expire later in time are more expensive than those that are nearer-term.
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Example: Gold is a commodity whose futures exhibit forward or normal carry.
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Suppose it is March 1st and spot gold is trading at 351. Then, the futures contracts
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on gold and their respective prices might be as follows:
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Expiration Month Price
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April 352.50
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June 354.70
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August 356.90
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December 361.00
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June 366.90
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Notice that each successive contract is more expensive than the previous one.
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There is a 2.20 differential between each of the first three expirations, equal to 1.10
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per month of additional expiration time. However, the differential is not quite that
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great for the December, which expires in 9 months, or for the June contract, which
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expires in 15 months. The reason for this might be that longer-term interest rates are
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slightly lower than the short-term rates, and so the cost of carry is slightly less.
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However, prices in all futures don't line up this nicely. In some cases, different
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months may actually represent different products, even though both are on the same
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underlying physical commodity. For example, wheat is not always wheat. There is a
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summer crop and a winter crop. While the two may be related in general, there could
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be a substantial difference between the July wheat futures contract and the
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December contract, for example, that has very little to do with what interest rates are.
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Sometimes short-term demand can dominate the interest rate effect, and a
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series of futures contracts can be aligned such that the short-term futures are more
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expensive. This is known as a reverse carrying charge market, or contango.
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INTRAMARKET FUTURES SPREADS
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Some futures traders attempt to predict the relationships between various expiration
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months on the same underlying physical commodity. That is, one might buy July
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soybean futures and sell September soybean futures. When one both buys and sells
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differing futures contracts, he has a spread. When both contracts are on the same
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underlying physical commodity, he has an intramarket spread.
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