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

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THE HAnDbOOk Of TECHnICAL AnALySIS

Sometimes, the next contract may be trading at a lower price, in which case
the trader rolling over into the new contract will receive a payment. In such cases,
we say that the new contract is trading at a discount to the previous contract. It is
not uncommon for successive new contracts to roll over at a discount, resulting in
accumulated gains, boosting profits along the way. It is therefore actually possible
to make a profit by being long in a declining or sideways market if the rollover
discounts are large enough. Rolling over at a discount causes the trader to experi-
ence positive roll yields. See Figure 3.33.
Another interesting characteristic of futures contracts is that further‐out con-
tracts may be trading a successively lower or higher prices compared to the near-
by contract or spot price. When further‐out contracts are trading at successively
higher prices when compared to the expected spot price at expiry, we say that the
market is in normal contango. Conversely, if further‐out contracts are trading at
successively lower prices when compared to the expected spot price at expiry, we
say that the market is in normal backwardation. Sometimes, the terms contango
and backwardation (especially when the term normal is dropped) may also be
used loosely to mean that further‐out contracts may be trading at successively
lower or higher prices compared to the nearby contract or current spot price. This


figure 3.32 Losses from Negative Roll Yields.


figure 3.33 Profiting from Positive Roll Yields.

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