what is the idea behind Front Month BacK Month

[oiltanker]

i've seen some trade using two month contracts- usually on stirs.i buy front month sell back month. what is the idea behind that and can it apply to futures month contracts?

 

[MrGecko]

Its a relative value trade; months farther out are generally more volatile than front month contracts.

So I can go long, say, Dec 09, and short Dec 10; my trade is that Dec 10 will fall further than Dec 09.

 

[oiltanker]

so the trades would be closed when a suitable profit appears?

are there stops?

is that what pairs trading is? like going long euro and short ftse or whatever contracts are correlated?

 

[arabianights]

no, it's more specialised than that...

Then you can trade butterflies, condors, boxes etc (these have different meanings to options)

i.e. a butterfly is short one spread, long another, net position +1 -2 + 1 when long
condor is long two butterflies, net position +1 -1 -1 +1
box is long one butterfly, short another, i.e. +1 -3 +3 -1
pack is +1 +1 +1 +1. Has to be one colour I *think*
then a strip is a combo of packs....


With STIRS you're taking a view on the yield curve with these strategies... With commodity futures you're taking a view partly on the yield curve but mostly on supply/demand curves... Contango/Backwardation/wahtever

 

[MrGecko]

There are intra-contract spreads, as Arabian described. They are popular in STIRS partly because of the liquidity (lol), and partly because they are about maths; the Dec 09 Dec 10 contracts are not just correlated, but thanks to Mar10, Jun10 and Sep 10, it can't get too far out of line with "fair" value without being arbed away.

If you are talkin about the Oil markets, then you still have intra contract trades (like backwardation / contango positions, but as I understand it you really need to be able to trade the cash and basis to make these work properly), but also the inter-contracts (crack spread, for example).

Spread trading generally works in two ways; either taking relative value positions (in which case it is very much like pairs trading, either inter or intra contract), or building an inventory of contracts you collect an inside market prices - an inventory that pretty much sums to nil, so you have very little, if any, exposure to directional movements - and offloading the contracts to a price taker, and earning the spread

others will be able to add more

 

[oiltanker]

i saw liffe has a list of what they call recognised trades [lots of them] with those names but i think they were options.

i saw on the euro bonds site calculations for trading combinations on shatz, bobl, bund etc.

is green white etc the names of the months or the strats?

i remember someone [was it Anton on millionaire traders?] saying not to trade straight positions but to have 'a book' which had a bias [up or down] but was never all one way like only going long euro based on a setup or whathaveyou.