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Lumber Future Term Structure

  • #1
  • First Post: Mar 8, 2017 2:40pm Mar 8, 2017 2:40pm
Is there anyone interested in lumber? I am not interested in simple lumber price but in future term structure.
I see now it is in contango and also last 2 years it was in contango, even if it has high prices. Instead, 3-4 years ago it was in backwardation also strong.
It is strange, it would be a regular commodity, so it would be or always incontango or always in backwardation. I need a commodity with regular future term structure, backwd or contango is the same, but it must be constant.
Can anyone explain it? Peraphs did it change anything in the trade mechanism of physic lumber (and indirectly in futures prices), in storage or insurance or transport cost? Can we think it will remain in contango in next years?
  • #2
  • Mar 8, 2017 4:37pm Mar 8, 2017 4:37pm
Quoting sabbb
Is there anyone interested in lumber? I am not interested in simple lumber price but in future term structure. I see now it is in contango and also last 2 years it was in contango, even if it has high prices. Instead, 3-4 years ago it was in backwardation also strong. It is strange, it would be a regular commodity, so it would be or always incontango or always in backwardation. I need a commodity with regular future term structure, backwd or contango is the same, but it must be constant. Can anyone explain it? Peraphs...
Gold & silver are almost always in contango.

Why do you think lumber should always remain in contango or backwardation & not change? It's a commodity like any other that has changing supply/demand fundamentals. Big fires that burn large areas of forest might reduce lumber supply for short periods of time creating higher prices. If the housing market goes into a slump then less houses being built will create too much lumber available so lower prices.
  • #3
  • Mar 9, 2017 6:40am Mar 9, 2017 6:40am
Quoting srt
{quote} Gold & silver are almost always in contango. Why do you think lumber should always remain in contango or backwardation & not change? It's a commodity like any other that has changing supply/demand fundamentals. Big fires that burn large areas of forest might reduce lumber supply for short periods of time creating higher prices. If the housing market goes into a slump then less houses being built will create too much lumber available so lower prices.
Thanks for suggesting silver and gold. Do you know anything other?

About lumber (and also other commodities):
if it is produced day by day, you are right. A strong immediate demand rises prices of first future and other ones remain lower in backwd.
But is there not a lumber storage? If there is lumber in stores, traders prefer sell at short term and higher price than longer term at lower price and contango would return. Is it?
  • #4
  • Mar 15, 2017 5:17am Mar 15, 2017 5:17am
Sabbb, you can forget it, you will not find a commodity with a stable term structure, i.e. always in contango or always in backwardation. This is mainly because there is always a reason for the current term structure and why it is in contango or backwardation. Since the future is uncertain and nobody knows what it will bring, you can't really be certain that a certain commodity will maintain indefinitely it's term structure shape/format.

I think I understand what you are trying to achieve. You are probably trying to find a stable term structure and trade future spreads based on it to capture the contango or backwardation yield. Good strategy, however, the obstacle as mentioned is that there is no guarantee that the term structure will stay stable and not change.

Gold, Silver & platinum are almost always in contango and rarely turn to backwardation (Maybe they will do in a very deep crises), however, the contango level in the curve is not worth capturing. Precious metals are treated like money, so the futures are priced primarily based on interest rate differentials (Just like any currency pair). Gold pays zero interest and there is small amount to be paid for storage & insurance, so in fact it has a slight negative yield. Put that against a 0.75% rate for USD and you get a medicore contango yield, not worth capturing.

Most Energies are always in contango, if you take crude oil, it's almost always in contango, however, again, beware of wars, terrorist attacks on oil fields and similar special events.

In my opinion, crude oil would be the most appropriate commodity to take advantage of contango yield as it has one of the most stable term structures (That does not invert so often) and at the same time, the yield is still attractive.

Good luck.

Nader
  • #5
  • Edited 2:44pm Mar 16, 2017 5:42am | Edited 2:44pm
Quoting narafa
you will not find a commodity with a stable term structure, i.e. always in contango or always in backwardation. This is mainly because there is always a reason for the current term structure and why it is in contango or backwardation. Since the future is uncertain and nobody knows what it will bring, you can't really be certain that a certain commodity will maintain indefinitely it's term structure shape/format.
Thanks for your answer.
Backwardation or contango have a reason and it depends on physical product and its market and also by demand/supply. I would understand the instrument apart of I gain or not.
Usually commodities are in contango because

  1. product is already existing
  2. traders request a higher price to sell laterr, and this would always happen, apart of demand/supply: they would be mad if sell later and at lower price.

Backwardation can happen only if there is a so strong immediate demand that stored commodities are not enough. It happens for natural gas in cold winter. But also it would be a brief period.
If this mechanism doesnt run there is some particular feature in that specific physical market. But none can explain it.

Quoting narafa
I think I understand what you are trying to achieve. You are probably trying to find a stable term structure and trade future spreads based on it to capture the contango or backwardation yield. Good strategy, however, the obstacle as mentioned is that there is no guarantee that the term structure will stay stable and not change.
?????? I dont understand what you mean. Even if I find a commodity in stable contango/backwardation, there is no gain with a spread (buy first future / sell 2nd or viceversa). What I gain with long, is the same I lose with short. If I want a yeld from contango and it is always in contango I would be simply short.
Oil has been 2 years in backwardation.

If you want I have another question. What do you think about grid trading? Would it be possible a grid trading using also stop?
  • #6
  • Mar 16, 2017 6:01pm Mar 16, 2017 6:01pm
Sabb, there is indeed a contango/backwardation yield which can be captured using future spreads. In a contango term structure, future spreads trend upwards (F1-F2) trends upwards, so you short the first month and long the second month and capture a widening trending spread. In that case you will make more money on your short than what you lose on your long.

You said if you want a yield from contango you would be simply short, not really as this is a directional position, while a spread is merely a non-directional position.

The exact opposite is true when the term structure is in backwardation.

Correction, Crude Oil has been in Contango since Dec 2014 till now, check the image attached.

I am not very familiar with grid trading, what is it exactly?
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  • #7
  • Edited 5:15am Mar 17, 2017 5:04am | Edited 5:15am
Quoting narafa
Sabb, there is indeed a contango/backwardation yield which can be captured using future spreads. In a contango term structure, future spreads trend upwards (F1-F2) trends upwards, so you short the first month and long the second month and capture a widening trending spread. In that case you will make more money on your short than what you lose on your long.
Yes, sometimes it is true, but sometime is not.
Quoting narafa
I am not very familiar with grid trading, what is it exactly? {image}
You can search in web it is not a my idea. Basically it is to buy every X pip when the instument goes down and sell every position when has a certain gain.
The advantage is that there is no indicator oscillator etc.
It has basically 2 problem. You must have a lot of money to resist the trend against. At this point the strategy yeld become low.
And to exit from all positions in gain is possible but very slow.
It would be a good idea if you find a title (real or synthetyic such as a spread) that moves in a little range (in this case you don't need a lot of money). But I don't know any.
So I think at a grid system that uses stop but I found nothing convincing till now.
  • #8
  • Mar 18, 2017 12:59am Mar 18, 2017 12:59am
[Quoting sabbb] Is there anyone interested ... I need a commodity with regular future term structure, backwd or contango is the same, but it must be constant.... [/quote]

[Quoting narafa] Sabbb, .... You are probably trying to find a stable term structure and trade future spreads based on it to capture the contango or backwardation yield. Good strategy, however, the obstacle as mentioned is that there is no guarantee that the term structure will stay stable and not change. Gold, Silver & platinum are almost always in contango and rarely turn to backwardation (Maybe they will do in a very deep crises), however, the contango level in the curve is not worth capturing. .... In my opinion, crude oil would be the most appropriate commodity to take advantage of contango yield as it has one of the most stable term structures (That does not invert so often) and at the same time, the yield is still attractive. Good luck. Nader [/quote]

[Quoting narafa] In a contango term structure, future spreads trend upwards (F1-F2) trends upwards, so you short the first month and long the second month and capture a widening trending spread. In that case you will make more money on your short than what you lose on your long.

You said if you want a yield from contango you would be simply short, not really as this is a directional position, while a spread is merely a non-directional position.[/quote]


Sabbb, and Narfa:
I trade certain VIX products (mainly ETFs and options and futures). I know VIX futures are in contango almost 90% of the time; which in my opinion is pretty "constant". And I have a certain feel of when they might start backwardation in that (approx) 10% of the time so can adjust the trading strategies or positions accordingly.

In addition, the contango between the front month and 2nd month futures is usually between 5 to 15%. For example, the prices of the F1 future contract today is 11.76 and the F2 is 13.28. That's a whopping 12.9% contango, a level worth capturing. Even the slower term structure between the F2 and F3 is 6.9%. Based on this kind of term structure, how would one trade the future spreads or directionally?

Narfa, I am not sure I follow your approach(s) you mentioned in the trading strategy above. Could you kindly elaborate more on the strategy details? Thank you very much.

~Bill
  • #9
  • Mar 18, 2017 8:09pm Mar 18, 2017 8:09pm
http://quantpedia.com/Blog/Details/t...of-vix-futures

"R. Rhoads proposes in chap. 12 of [Rhoads, R.: Trading VIX Derivates, John Wiley&Sons, 2011] a simple calendar-spread strategy which is based on the normal term-structure. Sell with a maturity of 3-4 months the nearer future and go the next future long. The position is closed on Friday (5 days) before expiry. The strategy sells volatility insurance. It is similar to selling Puts. The second future hedges somewhat the risk. The strategy is – like all insurance-selling strategies – in the long run profitable. Rhoads proposes a simple filter. One stays out of the market as long as the future- premium is negative. The filter improves risk (but not necessarily the overall win) somewhat."
"If The Fool persists in his Folly he will become wise." - William Blake
  • #10
  • Mar 18, 2017 8:29pm Mar 18, 2017 8:29pm
Quoting sabbb
Is there anyone interested in lumber? I am not interested in simple lumber price but in future term structure. I see now it is in contango and also last 2 years it was in contango, even if it has high prices. Instead, 3-4 years ago it was in backwardation also strong. It is strange, it would be a regular commodity, so it would be or always incontango or always in backwardation. I need a commodity with regular future term structure, backwd or contango is the same, but it must be constant. Can anyone explain it? Peraphs did it change anything in the...
I dont understand what you mean. Even if I find a commodity in stable contango/backwardation, there is no gain with a spread
  • #11
  • Edited 9:27pm Mar 18, 2017 9:06pm | Edited 9:27pm
trading VIX spreads a complicated subject & I don't have time to go into it but anybody who does will find some interesting possibilities. Zebrasquirl does some term structure spread trading you can see sometimes in his thread....

http://www.tastytrade.com/tt/shows/m...ads-08-01-2016
"If The Fool persists in his Folly he will become wise." - William Blake
  • #12
  • Mar 18, 2017 9:22pm Mar 18, 2017 9:22pm
they told me at the clinic that I was clean, so it's ok - I can handle some long vol - anyway I think maybe if we get a localized nuclear war brewing in east Asia I might like to have some long vol running.....my accounts could be in good shape when I come out of the bunker...
Attached Image (click to enlarge)
Click to Enlarge Name: 2017-03-18_1918uvxy.png Size: 74 KB
"If The Fool persists in his Folly he will become wise." - William Blake
  • #13
  • Mar 18, 2017 9:46pm Mar 18, 2017 9:46pm
http://vixcentral.com/

http://seekingalpha.com/instablog/10...x-and-contango

http://sixfigureinvesting.com/2015/0...ily-roll-work/

lots of good food for thought on the sixfigureinvesting blog site
"If The Fool persists in his Folly he will become wise." - William Blake
  • #14
  • Mar 19, 2017 6:16am Mar 19, 2017 6:16am
Quoting calaxcorp
I know VIX futures are in contango almost 90% of the time; which in my opinion is pretty "constant". And I have a certain feel of when they might start backwardation in that (approx) 10% of the time so can adjust the trading strategies or positions accordingly.
This is an old a well known phenomenon.
You can go simply short (also with a CFD that doesn't require so much money) or make a future spread. The problem is always the same. In some periods future structure pass in backwardation ant in that moment begin loss. If it is a brief period previous gain are bigger. In 2015 it has been in backwd for 5-6 months.
Are you sure that is a brief period?
What do you mean with "can adjust the trading strategies or positions accordingly"? When begin backwd you are already in loss.
  • #15
  • Mar 20, 2017 4:13am Mar 20, 2017 4:13am
Quoting calaxcorp
In addition, the contango between the front month and 2nd month futures is usually between 5 to 15%. For example, the prices of the F1 future contract today is 11.76 and the F2 is 13.28. That's a whopping 12.9% contango, a level worth capturing. Even the slower term structure between the F2 and F3 is 6.9%. Based on this kind of term structure, how would one trade the future spreads or directionally? Narfa, I am not sure I follow your approach(s) you mentioned in the trading strategy above. Could you kindly elaborate more on the strategy details?...
Based on the contango term structure you mentioned for VX Futures, you ideally would short F1 and long F2, thus creating a future spread trade. So how is this possible to be profitable? The spread itself will trend in your direction, so long the contango stays in place and does not shrink in absolute points terms. The more time passes, the more F1 will get pulled down away from F2 and thus the spread will widen further, causing your future spread profits.

For crude oil, it's the same concept, the more time passes, the more the F1 future will get pulled down away from F2 and thus the same spread will widen and this is where your profits will come from.

This vs. a directional position, which is just short F1 is completely different. Shorting F1 naked puts you in the shoes of a certain level of the underlying where above you lose money and below you make money, while the futures spread position is not level related, it's term structure related.

Hope this clarifies it, let me know if you need further details.
  • #16
  • Mar 20, 2017 6:07pm Mar 20, 2017 6:07pm
Quoting narafa
Hope this clarifies it, let me know if you need further details.
the initial spread will cost something, no guarantee of enough profit to offset the initial debit. You can diagonalize the spread, I do with options all the time, but that ties up margin. You might get in for a small credit that way and then an increase in IV and/or a favorable directional move in the underlying can put the spread in good profit....or steep loss. Trading spreads is really imo the best way to trade but there's lot's to know and all kinds of dangers if you don't know lots. Why don't you show an example with real-time data to show what you are talking about?
"If The Fool persists in his Folly he will become wise." - William Blake
  • #17
  • Last Post: Mar 21, 2017 2:22am Mar 21, 2017 2:22am
Quoting The Fool
{quote}the initial spread will cost something, no guarantee of enough profit to offset the initial debit. You can diagonalize the spread, I do with options all the time, but that ties up margin. You might get in for a small credit that way and then an increase in IV and/or a favorable directional move in the underlying can put the spread in good profit....or steep loss. Trading spreads is really imo the best way to trade but there's lot's to know and all kinds of dangers if you don't know lots. Why don't you show an example with real-time data to...
What do you mean the initial spread will cost something? It's a future spread (Not an options one), so the only thing is margin tied up against the spread trade and usually it's much lower than the margin for the outright future contract alone.
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