Futures: A ‘Tail’ of Fear

Gaurav Chhibbar is a partner at Metal Edge Partners, a firm engaged in Risk Management and Strategic Advisory. In this new role, he and his firm design and execute risk management strategy for clients along with providing process and analytical support. In Gaurav’s previous role, he was a trader at Cargill spending time in metal and freight markets in Singapore before moving to the U.S. He can be reached at gaurav@metaledgepartners.com for queries/comments/questions.

This market is handing nearly a $100 discount between the front month (Aug’18) and six months out (Feb’19). With the spot month trading at below the benchmark index, it represents the view of those selling that the index will be under pressure going into August. The backwardation itself, while steep, has presented some interesting calendar spread possibilities for those with the view that the difference between any two time buckets will compress or expand. A calendar spread involves a parallel buy and sell of futures with different expiration dates. These can come in very handy when managing or shifting risk across different parts of the curve.