Three things to understand when making a long-term lease

Three things to understand when making a long-term lease

Cross-term arbitrage is a profitable way of trading a commodity using the monthly contract price fluctuations. It is one of the earliest and most established methods of arbitrage trading and has become the preferred method for investors seeking stable returns.

• The first thing to understand when making a long-term arbitrage trade is what causes the price difference between commodity contracts to fluctuate and return. From the point of view of the author's process of trading research, the main fluctuation factors include:

  • One is the supply factor. The loose annual supply of different crops of agricultural products due to the progress of industrial production capacity and the loose annual supply leads to short-term price differences.
  • The second is the financial factor. The centralized preference of funds for the target contract can lead to price fluctuations, such as moves, pushes, etc.
  • The third is seasonality. Due to the seasonal characteristics of commodity production, trade and consumption, there are strong and weak differences in prices between contracts. For example, seasonal sales of agricultural products; seasonal purchases of non-ferrous metals; differences in crude oil consumption during the low season; characteristics of the beginning of the low season of construction materials.
  • Fourth is weather; as contract prices are more sensitive to short-term weather changes in recent months, this leads to short-term price fluctuations; such as typhoons causing interruption of crude oil production; bad weather affecting short-term logistics transportation; etc.
  • Fifth is the rule factor. The unilateral provisions of the trading venue for the delivery of the stock will cause the price of the contract to fluctuate before and after a certain time, such as the contract before the expiry of the contract for the sale of the stock stipulated in rubber or plastic. In addition, the rules of the exchange adjustment will also cause the contract before the expiry of the contract to fluctuate.
  • The sixth is the policy factor. Due to the differences in the impact of policy adjustments on commodities at different times, the price of different contracts fluctuates. For example, the policy adjustment of soybeans and cotton directly causes large fluctuations in the prices of new and old crops. In addition, changes in international trade policy can also cause differences in the price of long-term contracts in recent months.
  • 7 is the cost factor; the holding cost is limited by the volatility of the short-term contract price difference, i.e. the price of the long-term contract is significantly higher than the price of the recent month, which can lead to a price reversal; the price fluctuation of non-ferrous metal contracts, for example, is easily limited by the holding cost; 8 is the expectation factor; the price difference can also be caused by the investor's expectation of economic developments and price trends; in addition, the long-term contract is subject to more uncertainty than the recent contract; 9 is other factors; such as sudden events affecting the price of the recent month, and the usual actions of large investment institutions.

• Secondly, master the main trading patterns of cross-term leverage.

  • The first is the positive delivery model. The focus is on the opportunity of a long-term contract that is significantly higher than a short-term contract. The profit opportunity = the price difference between the long-term and the short-term - the cost of holding.
  • The second is the price-disparity trend model. The trend once formed is not easily changed, and so is the price-disparity trend. This model focuses on the smooth trading opportunities after the price-disparity trend is established.
  • The third is the regression trading model. By analyzing the distribution of historical price differences and operating patterns, the regression trade is conducted when the price difference deviates from or approaches the boundary of the historical volatility zone.
  • The fourth is the statistical leverage model. This trading model uses high-speed statistics to establish the strengths and weaknesses of different contracts and then open trades accordingly.

• Lastly, cross-term arbitrage is a delicate activity, with attention to analytical details and summary experience.

  • One is to analyze what is certain and what is uncertain before trading, and understand the risks of trading.

  • Secondly, in the case of price fluctuations, instantaneous leverage opportunities are not available to the average person.

  • The third is from the point of view of slippage cost factors, it is best to place an order when the price differential fluctuates smoothly, and to place a low-liquidity contract first.

  • Fourth, pay attention to the main volatility time of the price difference in the relevant contract, early entering the time cost. For example, the contract for 1 ton of agricultural products per year in May often begins to fluctuate regularly after September of the previous year.

  • The fifth is to pay attention to background analysis when doing regression trading. Only in a similar context, the historical price differential distribution and volatility laws are more relevant.

  • The sixth is the focus on the critical points and critical times of price fluctuations, which can often serve as a reference point for stopping losses or closing trades.

  • When analyzing the price difference, it is also important to pay attention to the ordering of the contract for the whole month of the commodity, which often suggests trading opportunities. For example, soybeans and plastics have been close to strong and weak in recent years.

    It should be noted that in recent years, with the increase in the number of arbitrage traders and the constant changes in the market, traditional opportunities for cross-term arbitrage are decreasing. However, there is always a shortage of opportunities for cross-term price fluctuations in the market, and arbitrage trading models and ideas need constant innovation.

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