In our last discussion, we explored how borrowing is used to postpone a short position, with an example of buying April and selling June. When the market was in contango, we earned profits, and during backwardation, the strategy still worked in our favor. But when the conditions were unfavorable, we faced losses.
Today, let’s shift gears and focus on managing a long position. Specifically, how to move a long position forward in time using borrowing.
Moving a Long Position: From April to March
Imagine you are currently long in April but need to be long in March instead. To achieve this:
- Buy March – This establishes your new anticipated position.
- Sell April – This closes your current long position in April.
Why sell April? Because closing a futures position requires doing the opposite of the original action for the same contract date. If you were long in April, selling April effectively offsets and closes that position.
Borrowing for Longs and Shorts
The concept of borrowing applies in both cases:
Postponing a Short Position: For example, moving a short from April to June involves selling June and buying April.
Anticipating a Long Position: As in our example, moving a long from April to March involves buying March and selling April.
Both strategies rely on borrowing, making it a critical tool in futures trading.
What’s Next?
Next time, we’ll delve into how contango or backwardation curves impact your strategy when anticipating a long position. Understanding these market dynamics will be key to refining your approach and maximizing returns.
Stay tuned! Mastering these concepts can make or break your futures trading game!