In our last discussion, we explored the concept of going short in the futures market, focusing on how this position performs when prices rise or fall. We also clarified the role of guarantees. Now, let’s dive into an intriguing new topic: the concept of carrying a short position forward into a new contract period—also known as a carry trade.

Imagine you hold a short position set to expire in December, but you wish to extend it into January. To do this, you’d execute a carry trade by “rolling over” your position from one contract to the next. This transition involves closing your December short and opening a new short for January.

In futures markets, prices often vary depending on the contract’s time frame. This brings us to an important pricing structure known as contango. Contango occurs when the prices of contracts with further-out expiration dates (like January or February) are higher than those closer to the present (like December). For example, if January prices are higher than December, the market is in contango.

Here’s where it gets interesting: in a carry trade during a contango market, if you close your December position and open a new one for January, you could potentially benefit from the higher price of the January contract. This process, known as borrowing in contango, allows traders to profit from the roll-over as they “buy low” on the nearby contract and “sell high” on the further contract.

Stay tuned as we explore these futures pricing strategies in more depth and discuss contango, carry trades, and price structures in upcoming posts!