The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

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Mechanics and Dynamics of Charting


futures contracts, one closer and another further out, to create a calendar spread
or for other hedging purposes.
The nearby or front‐month contract has a few distinguishing characteristics
such as:

■ (^) An expiration date closest to the current date
■ (^) The narrowest bid‐ask spread
■ (^) The narrowest spread with respect to the spot price
■ (^) The most liquid contract
Figure 3.31 shows quarterly contract months expiring over a 12 month
period. Assume that we are currently in the month of March and that the March
contract has already expired. We may now choose to participate in the June
contract, which represents the nearby or front‐month contract. We may instead
choose to participate in the next month or next nearby contract, that is, the
September contract. We may even consider, depending on the trading strategy, to
participate in a far‐out or back‐month contract like the December or following
March contract.
Futures contract‐delivery months are given a letter of the alphabet for identifi-
cation purposes, namely: F for January, G for February, H for March, J for April,
K for May, M for June, N for July, Q for August, U for September, V for October,
X for November, and Z for December.
When a futures contract approaches expiry, traders begin to roll over into the
next nearest contract with the next closest expiry. The new contract may not be
trading at the same price as the nearby expiring contract. It may be trading at a
higher price, requiring the trader to pay a premium in order to participate in the
new contract. In such cases, we say that the new contract is trading at a premium
to the previous contract. Traders are required to roll over at a premium and this
will adversely affect the potential profitability of the trading campaign. It is not
uncommon for successive new contracts to roll over at a premium, resulting in ac-
cumulated losses, diminishing profits along the way. Hence it is actually possible
to lose money by being long in a rising or sideways market if the rollover premi-
ums are large enough. Rolling over at a premium causes the trader to experience
negative roll yields. See Figure 3.32.
figure 3.31 Identifying the Front‐, Next‐, and Back‐Month Futures Contracts.

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