Speculating Beyond Current Month?

M

Mr. KISS

I'm new to commodities trading (as will be apparent by this newbie question.)

I understand that the higher prices in the contracts farther out account for the contango, or cost of storage. Do these prices also include an expectation for seasonal price increases, such as due to the winter heating season or is it just the spot price plus the contango?

With that being said (or typed rather), if you are purely speculating for investment, is there any reason not to just buy the closest contract and keeping rolling it at expiration? Because it would seem if the price for future contracts was higher only because of the contango, if you used the hypothetical situation that the price stayed flat, then you would lose money as the contango shrinks over time.

On the other hand, if seasonal price fluctuations are built in, then would the best method to choose which month to speculate on involve simple drawing a trend line from the current price to the expected price in a future month and looking for a contract in which the price is the farthest percentage above the expected price? I'm probably making things more complicated than necessary (and looking like a fool.) But you have to start somewhere.

If you want to give a example, let's assume I expect the spot price on Natural Gas at the expiration in December this year will be 5.00 Which contract should I currently buy?


Thanks in advance for the clarification.
 
Quote from Mr. KISS:

I'm new to commodities trading (as will be apparent by this newbie question.)

I understand that the higher prices in the contracts farther out account for the contango, or cost of storage. Do these prices also include an expectation for seasonal price increases, such as due to the winter heating season or is it just the spot price plus the contango?

With that being said (or typed rather), if you are purely speculating for investment, is there any reason not to just buy the closest contract and keeping rolling it at expiration? Because it would seem if the price for future contracts was higher only because of the contango, if you used the hypothetical situation that the price stayed flat, then you would lose money as the contango shrinks over time.

On the other hand, if seasonal price fluctuations are built in, then would the best method to choose which month to speculate on involve simple drawing a trend line from the current price to the expected price in a future month and looking for a contract in which the price is the farthest percentage above the expected price? I'm probably making things more complicated than necessary (and looking like a fool.) But you have to start somewhere.

If you want to give a example, let's assume I expect the spot price on Natural Gas at the expiration in December this year will be 5.00 Which contract should I currently buy?


Thanks in advance for the clarification.
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Drive down to Cushing an let us know how full are these thanks:

<img src="http://www.elitetrader.com/vb/attachment.php?s=&postid=2514232">
 

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PAPA ROACH is your man here. Wait for him or search his posts.

He is not one of these dudes:

<img src="http://www.elitetrader.com/vb/attachment.php?s=&postid=2514250">
 

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Quote from Mr. KISS:

I'm new to commodities trading (as will be apparent by this newbie question.)

I understand that the higher prices in the contracts farther out account for the contango, or cost of storage. Do these prices also include an expectation for seasonal price increases, such as due to the winter heating season or is it just the spot price plus the contango?

With that being said (or typed rather), if you are purely speculating for investment, is there any reason not to just buy the closest contract and keeping rolling it at expiration? Because it would seem if the price for future contracts was higher only because of the contango, if you used the hypothetical situation that the price stayed flat, then you would lose money as the contango shrinks over time.

On the other hand, if seasonal price fluctuations are built in, then would the best method to choose which month to speculate on involve simple drawing a trend line from the current price to the expected price in a future month and looking for a contract in which the price is the farthest percentage above the expected price? I'm probably making things more complicated than necessary (and looking like a fool.) But you have to start somewhere.

If you want to give a example, let's assume I expect the spot price on Natural Gas at the expiration in December this year will be 5.00 Which contract should I currently buy?


Thanks in advance for the clarification.
More...

You don't sound stupid at all. At least you've put some thought into it.

Just be aware that contango eats away every time you roll. Backwardation on the other hand is a god send for people who have gone long the front and want to keep rolling at expiry.

Of course, the price includes the cost of spot plus the cost of carry, including insurance, storage, financing etc, but I think will also include a premium of how much people think the price will be affected due to seasonality.
 
Quote from Mr. KISS:
-----Do these prices also include an expectation for seasonal price increases, such as due to the winter heating season or is it just the spot price plus the contango?
-----is there any reason not to just buy the closest contract and keeping rolling it at expiration?
More...
1) Yes, sort of. Look at the build-up of "premium" into the February contract and then the decline into the May contract.
2) You'll have plenty of liquidity in the front-most months and enough volatility to shorten your time horizon making it easy to continue rolling forward. Don't get hung up on holding a deferred position for months and months.
 
So all other thing being equal, I end up paying for the contango whether I buy a front month and keep rolling it, or whether I sit on a farther out month that I don't have to roll as often?

Seems like it mainly boils down to doing some analysis and coming up with your own price forecast for the next few months and see which contract price is most conservative compared to that estimate.
 
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