Arbitrage trading month to month oil contracts

[waz]

I do a lot of arbitrage/pairs trading and Ive noticed how the monthly contract price for oil always goes bonkers on the last two days of trade. Especially since the July when it started coming down.

Anyways, just by going from prices supplied in IG index.
The current price for March US Light Crude is $34.48
The current price for April US Light Crude is $42.31


History tells me that the March contract will go up on the last few days of trade to more closely reflect the April price. Chances are, 95% of the entire world is expecting the same thing to happen, including ASF forumers.

So if this is the case, why arn't more people going long on the march contract? And at the same time you can also go short on the April contract.
Is there something I'm missing?

I am assuming this situation arises as some hedge fund has a massive position causing liquidity issues. However a small player like me using a MM platform can make a killing.

Has anyone noticed similar situations for the contracts of other metals/commodities?

 

[skc]

You should definitely be aware that the rolling dates and procedures of your MM. Many of them have roll dates before the actual expiry (to avoid receiving physical delivery, or so they claim) and this could mean that the prices haven't actually converge. And if they auto roll your contracts then you've just been arbitraged by them!

Also, I read somewhere that certain MM won't let you go long near-month and short far-month of the same contract. Although you should be able to get around that with two different providers.

The same pricing situation was well documented for the Jan contracts (search Bloomberg for an article). Unfortunately, I don't believe IG provide you with charts of an expired contract, so you will not know how their prices behaved in those dates around (their) expiry.

Good luck.

 

[waz]

Thanks skc

From memory, the last two months, they didn't converge exactly, although the gap did narrow, with the nearer month going higher (percentage wise) than the later month falling.

I will report back end of next week to let you know how this strategy played out. I am likely to close out before rollover and take whatever profit I get before my MM tries to do something funny.

I probably shouldn't be experimenting with real money, although I have plenty of shorts in other markets to cover any potential loss here.

 

[waz]

Thought I'd provide a little update to my arbitrage trading punt.

When I went long the nearer month contract, the gap between the month to month contract was $7.83 on friday the 13th

A few days later on monday the 16th, the gap has narrowed to $4.20.

 

[waz]

Update
March contract is $35.91
April contract is $38.72

The gap is now $2.81 and Im ready to close out of my position with a profit.
Last week the gap was closer to $8.

So this turned out to be a pretty good arbitrage pair.
I only wish I had position on both sides and shorted the April contract.
Which is really what arbitrage trading is all about.

Im hoping a similar situation arises next month.

 

[waz]

Grrr, I wish I had waited a lil longer.

Gap is now 90c (just before rollover on IG index)
March contract went gangbusters as expected and now its $39

Originally got in at $34.48

 

[wayneL]

Grrr, I wish I had waited a lil longer.

Gap is now 90c (just before rollover on IG index)
March contract went gangbusters as expected and now its $39

Originally got in at $34.48

Why not use futures?

 

[wayneL]

Just a pedantic point:

This is not "arbitrage" trading, it is futures spread trading. There is an important difference.

See: http://en.wikipedia.org/wiki/Arbitrage

and http://en.wikipedia.org/wiki/Spread_trade

 

[Wysiwyg]

Anyways, just by going from prices supplied in IG index.
The current price for March US Light Crude is $34.48
The current price for April US Light Crude is $42.31


History tells me that the March contract will go up on the last few days of trade to more closely reflect the April price. Chances are, 95% of the entire world is expecting the same thing to happen, including ASF forumers.

So if this is the case, why arn't more people going long on the march contract? And at the same time you can also go short on the April contract.
Is there something I'm missing?

Has anyone noticed similar situations for the contracts of other metals/commodities?

This has never caught my attention but you were 100% correct.The March contract almost doubled the gain of the April contract at one stage tonight.IG has the March contract last dealing date as the 21st of Feb.