Front month vs most liquid month for contango management?

R

ReadyTrader

I’ve started trading gold futures and I’ve got to roll my August contracts next week. The contract with the most open interest is the December contact, but that also has more contango than the next front month contract. I’m only trading a couple of contracts, so having huge amounts of liquidity is not particularly necessary for me, but obviously, a more liquid market is always better. By default, I had just been rolling to the most liquid contract because that’s what the market seems to do, but now I’m questioning whether I might save on contango drag by rolling to the front month contract even if it has lower open interest. Thoughts?
 
I define the most liquid contract as the contract with the highest volume traded

You define the most liquid contract as the contract with the highest OI



Front-month contract Jul 2024 - volume almost zero

the most liquid contract is Aug 2024 with the highest volume

Oct 2024 contract - quite high OI at 60K.
Dec 2024 contract - highest OI at 345K
contract beyond Dec 2024 - not much OI.


Trading Aug 2024, Oct 2024, and Dec 2024 contracts (outright or spread) looks fine.
 
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If you are a long term trader, I would feel comfortable going with the December contract.
 
Right, I misspoke. The front month is still July. I currently own August contracts and don’t want to take delivery. I would assume that OI and liquidity are roughly correlated as those contracts move toward the front (I.e., more OI drives more volume). I’m long, so contango is working against me. Am I better off rolling to December, where it seems like everyone else is positioned but with higher contango premium, or to October, where the OI is much lower but so is the contango premium? What’s the thought process behind your answer? Thanks.
 
Mel Chizedek said:
The 'contango drag' is just cost of capital. It reflects interest rates. You can't "save on" it.
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You can't eliminate it, but you might be able to minimize it, right? In particular, contango isn't linear. Or am I missing something? Maybe the amount you could save relative to slippage associated with rolling contracts more often is such that you're better off moving from Aug to Dec rather than Aug to Oct to Dec. Or maybe it's all a wash or the savings so small as to be insignificant. I guess that's what I'm asking. In the case of gold, it seems like everybody rolls from the August contract to the December contract, and mostly ignores the near-term contracts.
 
Overnight said:
With GC, there ae 4 major months. Feb, Jun, Aug and Dec.

The in-between months are illiquid. Don't mess with them.
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OK, gotcha. Any explanation for why the major months don't have equal gaps? That is, Feb to June is 4 months, while June to Aug is 2, then 4 months from Aug to Dec, then 2 from Dec to Feb. Seems like odd cadence. Why not quarterly?
 
ReadyTrader said:
OK, gotcha. Any explanation for why the major months don't have equal gaps? That is, Feb to June is 4 months, while June to Aug is 2, then 4 months from Aug to Dec, then 2 from Dec to Feb. Seems like odd cadence. Why not quarterly?
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No idea on that, sir. It is a curious artifact of gold futures on the CME.

But ours is not to question why, but to do or die.
 
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