If I always keep a short position by rolling over the contract at the last trading day of the front month contract, assume the crude spot price does not change after one or two years and ignore the slippery when rollover, is the final realized return of this position always positive? I assume the crude oil futures will always be in contango. Do I miss some other hiden cost to trade such a hypothetical strategy?
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a hypothetical question regarding CL trading
- Thread starter clearpicks
- Start date
Quote from clearpicks:
If I always keep a short position by rolling over the contract at the last trading day of the front month contract, assume the crude spot price does not change after one or two years and ignore the slippery when rollover, is the final realized return of this position always positive? I assume the crude oil futures will always be in contango. Do I miss some other hiden cost to trade such a hypothetical strategy?
I'm unclear on how you are not losing money if the market is in an uptrend. Also, hurricane problems and other supply-side adverse events can produce backwardation in the crude market.
I calculate the annual return not month by month return and assume the price returns to the same price after twelve months.
These assumptions are very unlikely to hold true. You're talking about a commodity with extreme volatility, so price returning to normal every 12 months would be very unlikely, and you certainly cannot assume that the market will always be in contango. If I understand correctly you are trying to play the front month roll gap, but I think that may be a very risky strategy. Good luck.
Quote from clearpicks:
If I always keep a short position by rolling over the contract at the last trading day of the front month contract, assume the crude spot price does not change after one or two years and ignore the slippery when rollover, is the final realized return of this position always positive? I assume the crude oil futures will always be in contango. Do I miss some other hiden cost to trade such a hypothetical strategy?
To answer the question as you asked, you are correct.
This is why GSCI has lost money, the rolls in this steep contango are offsetting directional appreciation.
But like others said, you can't assume it will always be in contango.