[Tasuki]

Fat Tails,
Thanks for the extremely valuable information, and the links as well. From your description, my fears about getting the rollover wrong were well founded. Just goes to show, you shouldn't trade anything live that you don't understand thoroughly. On the other hand, I guess one could trade any of these contracts intraday without worrying about rollovers. Even then, I guess, you'd want to be careful not to get caught in a low volume contract month.
Tasuki

[Fat Tails]

Hi Tasuki,

your conclusion is absolutely correct. Low volume is one of the threats. Another one is the impact of the spot market for metals, oil and agriculturals. This may increase volatility and create wild gyrations of price prior to expiration. For fininancial futures there is less risk, because physical delivery has a lesser impact.

Besides there is a small mistake on my previous post , so let me correct it here:

Expiry for CME FX futures is not the 3 rd Wednesday of the contract month, but the 2nd business day prior to the 3rd Wednesday. This is usually a Monday. Rollover date is 5 business days prior to this date, also usually a Monday. If you want to get the correct dates, do what Tams said: Always go to the source. This is the website of CME Group!

Originally Posted by Tasuki »

Fat Tails,
Thanks for the extremely valuable information, and the links as well. From your description, my fears about getting the rollover wrong were well founded. Just goes to show, you shouldn't trade anything live that you don't understand thoroughly. On the other hand, I guess one could trade any of these contracts intraday without worrying about rollovers. Even then, I guess, you'd want to be careful not to get caught in a low volume contract month.
Tasuki

[Tasuki]

Originally Posted by Fat Tails »

Hi Tasuki,

your conclusion is absolutely correct. Low volume is one of the threats. Another one is the impact of the spot market for metals, oil and agriculturals. This may increase volatility and create wild gyrations of price prior to expiration. For fininancial futures there is less risk, because physical delivery has a lesser impact.

Besides there is a small mistake on my previous post , so let me correct it here:

Expiry for CME FX futures is not the 3 rd Wednesday of the contract month, but the 2nd business day prior to the 3rd Wednesday. This is usually a Monday. Rollover date is 5 business days prior to this date, also usually a Monday. If you want to get the correct dates, do what Tams said: Always go to the source. This is the website of CME Group!

FT, could you explan for us exactly what the "spot market" is? I have heard this term for years and years and I still don't know what it is, and how it differs from the futures contracts of agriculturals, oil and metals that we all trade. Many thanks,
Tasuki

[DugDug]

Tasuki -
please take this in a positive light.....
1) google it.
2) if you have been trading futures contracts and for years and years and have never bothered to find out about the spot market even though you have heard about it..... I can only shake my head and realise why many people loose money..... they dont even know what they are trading.

[Fat Tails]

This answer is correct, but does not help Tasuki, LOL.

Originally Posted by DugDug »

Tasuki -
please take this in a positive light.....
1) google it.
2) if you have been trading futures contracts and for years and years and have never bothered to find out about the spot market even though you have heard about it..... I can only shake my head and realise why many people loose money..... they dont even know what they are trading.

Futures contracts are contracts where you buy or sell a commodity at a given price to be delivered at a future date, the delivery date. You do not pay the good to be delivered, when entering the contract, but you are credited and debited daily price differentials.

Futures were invented in Japan in the 17th century to protect rice farmers against falling and merchants against rising prices. There was certainly a physical rice market where farmers sold rice "on the spot", before the futures market developped. The spot market ois the market place, where a physical commodity is sold and purchased.

Let us take gasoil for example. There are large oil companies/producers and(or traders that sell gasoil (diesel or heating oil) ex refinery or ex port. Traders, retail companies and large industrial consumers buy the stuff. Now this is traded all over the world, so you do not have a centralized market place. The spot market is therefofe dispersed. So - similar as for LIBOR - you need a service company to call all the market participants and collect the spot prices. Then the daily spot price is for example published as "Platt' Cargo CIF High" or "PCCH" for Northwestern Europe. This is the spot price. Then you have derivatives exchanges that offer contracts on futures on gasoil. You would look here at the gasoil contracts COIL (IPE) and HO (NYMEX). The futures contracts are traded on an exchange, so it is easier to catch the price of these, compared to the average price of all the spot transactions that occur in all major ports of the world. The futures exchanges often allow you to enter in a contract exchange for physical. In this case you will swap you futures position for a swap position. This is convenient for both parties as they will stay hedged against price risk during the transaction.

Another example is FOREX. There is no central FOREX market, but the spot market is dispersed, so if you compare two different retail FOREX brokers, they may not have the same quotes, because they adhere to different clearing systems. The currency futures traded at CME are exchange traded, so this again is a centralized market with prices easier to follow than for a large variety of market places.

In general, for financial futures the spot markets do not have a large imapct during the rollover period, because arbitrage is quite easy and does not involve physical handling, storage and transportation of the underlying. The only turmoil that might be created is the options expirations issue, but the impact is small if compared to the risks associated with the spot market for commodities.

Imagine again a squeeze in the expiring crude contract, because shorts cannot deliver and price shoots up An arbitrageur would actually need to buy cheap crude oil in a harbour place and deliver this via pipeline to Cushing, Oklahoma to benefit from the high price of the expiring futures contract. This can scarcely be done with a few days left to expriy, so arbitrageurs cannot stabilize the price. If an expiring index future is overpriced, it is easy for any large bank to buy the underlying shares and deliver them at expiry. So you won't see ES going wild prior to expiry in a way CL sometimes does.

[DugDug]

Hi Fat Tails while any info is good (so long as its accurate ), and every one appreciates it, I would have thought my advice is actually very helpful.
It may not have actually answered his question but I hope he can appreciate the advice. (It was probably a little harsh maybe)

I think the recent sub prime example (regardless of who why what caused it) really should be enough of a reminder that we should understand the underlying basis of the instruments you trade - even if only a good grasp of the basics. You may not need to know the ins and outs of the crude oil spot market, but to have been wondering about the spot market for years - that was what sparked my response.

[DugDug]

I have attached a word document that has some information for futures, rolling and longer term trading issues regards backtesting and the effect of backwardation and contango.

It is simple and general - if you dont agree with it or would like to add to it feel free to download it, amend it and upload it, noting the changes in the thread....so its a free and open discussion.
I hope it helps anyone get started in answering some questions regards the issue.

[forex_broker]

Good thread, something all Futures traders should be aware of. Holding an E-mini contract past expiration is bad enough but holding a physically delivered contract such as Crude or Gold can be disastrous.

The CME has a product calendar for all contracts, this will tell you the last trading date and the settlement date.

CL -
Light Sweet Crude Oil

GC - Gold

ZB -
U.S. Treasury Bond

6E -
EUR/USD

6S--
CHF/USD

Although the near month is usually the most liquid, this is not always the case. Take Gold for example, the near month is June, but the most liquid contract is the August 2010 expiration. Gold