Futures Strip
A futures strip is a type of derivative security that represents a series of consecutive futures contracts traded on the same underlying asset. It is a group of sequentially numbered futures contracts traded on the same commodity or financial instrument, covering a specific range of delivery dates.
Characteristics:
- Sequential: Futures strips are traded in chronological order, with each contract representing a subsequent delivery date.
- Uniform size: Contracts in a strip have the same size and expire on the same date.
- Cash-settled: Futures strips are cash-settled, meaning that they do not involve physical delivery of the asset.
- Traded on an exchange: Futures strips are traded on organized exchanges, such as the Chicago Mercantile Exchange (CME) or the New York Stock Exchange (NYSE).
- Hedging and speculating: Futures strips are commonly used for hedging and speculating purposes.
Components:
- Front month: The first contract in the strip, which expires closest to the current date.
- Back months: Subsequent contracts in the strip, expiring further into the future.
- Roll: A strategy of trading futures strips by rolling forward or back to adjacent contracts in the strip.
Examples:
- A Treasury bond futures strip consists of consecutive Treasury bond futures contracts for a particular bond.
- A corn futures strip consists of consecutive corn futures contracts for a specific delivery month.
Uses:
- Speculation: Futures strips can be used to speculate on the future price of an asset.
- Hedging: Futures strips can be used to hedge against potential price fluctuations.
- Trading strategies: Futures strips are used in various trading strategies, such as carry trades and straddles.
Advantages:
- Leverage: Futures strips offer leverage, which can amplify gains and losses.
- Liquidity: Futures strips typically have high liquidity, making them easy to trade.
- Flexibility: Futures strips can be traded in a variety of underlying assets and delivery dates.
Disadvantages:
- Time decay: Futures strip prices can decay over time, especially for longer-dated contracts.
- Contango: In some cases, contango (a premium for deferred delivery) can affect the pricing of futures strips.
- Risk: Futures strips carry the risk of loss, similar to any other derivative security.
FAQs
What is strip futures?
Strip futures refer to the simultaneous purchase or sale of multiple futures contracts that expire in successive months. This strategy allows traders to lock in prices for a series of months, often used for commodities or energy products.
What is futures strip pricing?
Futures strip pricing is the average price of futures contracts over a series of months. It is commonly used in the energy market to represent the cost of a commodity, such as oil or natural gas, over a specific time frame, typically for a series of consecutive months.
What is a 12-month strip?
A 12-month strip is a futures trading strategy where contracts for 12 consecutive months are bought or sold as a single package. It allows traders to hedge or speculate over a longer period, smoothing out price fluctuations.
What is the meaning of strip price?
The strip price refers to the average price of a series of futures contracts for consecutive months. This price can help investors or companies plan for future costs or revenues over a defined period.
What is strip trading?
Strip trading is the buying or selling of multiple futures contracts, often in a specific sequence over several months. It allows traders to take positions over a longer time horizon, minimizing the risks of short-term market volatility.
