What effects the differences between future prices?

[jls483]

(I have to confess that I am using spreadbets, but I guess that the price of the spreadbets are related to the futures they are based upon).

I have had conflicting advice on this question which is why I thought I would raise it here.

I'm a long term buy and hold man using spreadbets as a cheap and geared way to invest in indices, currencies and bullion. In the past I have been using rolling cash instruments but they are of course hideously expensive to finance. I did experiment with some monthly contracts in Oil, but in some months the cost of rolling over was far higher than it would have been if I had been using a rolling cash instrument. I decided that a predictable but expensive method was better than what appeared to be a randomly expensive method.

I've been told that the difference in price between a quarterly and a rolling cash only reflects the cost of carry. In other words if the opening price of GBPUSD rolling cash is adjusted by .00011 for every night that I hold it then the rolling quarterly will be lower than the rolling cash by about .00007 times the number of days to expiry (the rolling cash daily figure is larger because it is loaded).

However from my experience of trading the FTSE futures with IB is that it was quite possible for the DEC contract to be higher than the spot value and the MAR contract to be lower - it would seem that the price of the future is more to do with the expected level of the instrument at expiry.

So can anybody advise. Is there a simple explanation? Is it cost of carry or expectation or a combination of both? Or is it more art than science.

Many thanks,

John.

 

[mmillar]

The easy answer is that spreadbets and futures are short term instruments (haven't we had this discussion before?). Long term buy and hold strategies are best served by buying real shares. Sorry if that isn't particularly helpful.

I disagree with your byline BTW. Open your gob, ask lots of questions. It is better to look stupid but have the answers then to look intellingent but have no idea what is going on!

 

[jls483]

Mr Mmillar,

I'm afraid your first paragraph is not very helpful and we shall just have to agree to disagree. I find spreadbets allow me to make a much larger return on investments than I can with the normal shares that I trade within my ISA/PEP/SIPP.
I _REALLY_ don't want to get sidetracked (we've definitely done that in one of my threads before) but lets say I'm making 20% trading real ETF shares in my ISA, I can double that with spreadbets without too much exposure to risk. If you disagree - lets start another thread or send me a pm.

I'm perfectly happy to accept your second point - my byline does not always hold true and as if to prove it - I've posed this very question about future prices.

John.

 

[stevet]

the price that you see of any contract in the futures market is only going to be the last price that the contract was traded at

and the present ask and bid would represent the price that you could then trade at at that moment in time

so looking at the last price of any contract may not give you the real price that you would have to trade at and therefore be misleading

and the lack of liquidity in a forward contract is going to affect its real pricing and therefore value

i am not too sure how spreadbettors work - but for example their cash ftse price is based on the futures price and not the cash market price - and they probably come up with different types of costs for rolling contracts as a stealth way for them to make more money

for sure leverage is a key for making money in the markets - so subject to value - it is always going to be best to take a leveraged instrument - only those who do not understand risk/reward analysis view higher leverage as higher risk - but it is a complex subject and mastery of it is key to succesful trading

the other key is taking winning trades - and master that and all the other stuff falls into place!