what is the pro & cons of trading the near month contracts vs. further out?

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This may sounds like stupid questions to the experienced, but I never traded crude futures before.

If I am trading the April contracts, I have to close the position the latest this Friday, and then the contango kicks in. If I am long, I have to pay more to keep the same position. So isn't it better to buy the further out month, for example, July contracts to begin with?

Also, because everyone is trying to close the April position today or tomorrow, and the crude futures market is not very liquid to begin with, won't that influences the price? I.e., if there are more long positions than short ones, when those longs close, won't that drive down the price artificially?

 

[globalarbtrader]

This may sounds like stupid questions to the experienced, but I never traded crude futures before.

If I am trading the April contracts, I have to close the position the latest this Friday, and then the contango kicks in. If I am long, I have to pay more to keep the same position. So isn't it better to buy the further out month, for example, July contracts to begin with?

Also, because everyone is trying to close the April position today or tomorrow, and the crude futures market is not very liquid to begin with, won't that influences the price? I.e., if there are more long positions than short ones, when those longs close, won't that drive down the price artificially?

Things I consider when deciding which contract to trade are:

- liquidity (open interest, volume, )
- volatility (higher is better, as reduces trading costs).
- contango/backwardation
- seasonal effects

The right answer will be different depending on the market, and you're trading style.

(BTW I assume you're trading WTI not brent....)

In Crude I don't trade massively quickly, so I don't need to be in the most liquid front month. So what I tend to to is trade the DEC contract, which tends to have decent liquidity, rolling a couple of months before it expires.

This means I won't be picking up seasonal effects and makes my signal cleaner. This is very important for a systematic trader like, but might not bother you.

Volatility isn't much in it, unlike say in Eurodollar.

What you're describing is more like how I trade VIX. I like to stay a couple of months out in the term structure, rolling monthly so I stay in that position, though I might be flexible if the contango is a bit weird.

Liquidity is still pretty good in crude out to July right now, so thats probably a feasible option.

Also, because everyone is trying to close the April position today or tomorrow, and the crude futures market is not very liquid to begin with, won't that influences the price? I.e., if there are more long positions than short ones, when those longs close, won't that drive down the price artificially?

Depends on whether people are rolling, or closing outright. In theory if everyone rolls then nothing will happen although timing and other things will change the spread (since there are an equal number of longs and shorts; and the same number after the roll).