What are the skills of futures bear market arbitrage?

Bear market arbitrage means that investors buy forward contracts and sell recent futures contracts at the same time to achieve the purpose of arbitrage. So what are the skills of futures bear market arbitrage?

If investors predict that the price increase of futures contracts in recent months is less than that in distant months, or that the price decrease of futures contracts in recent months is greater than that in distant months, investors can make profits through bear market arbitrage at this time.

The method of futures arbitrage

There are three main forms of arbitrage in the futures market, namely, cross-delivery month arbitrage, cross-market arbitrage and cross-commodity arbitrage.

Cross-delivery month arbitrage (cross-month arbitrage)

Speculators use the price difference of the same commodity in different delivery periods in the same market to buy futures contracts in one delivery month and sell similar futures contracts in another delivery month, thus making profits. Its essence is to profit from the relative change of the price difference of the same commodity futures contract in different delivery months. This is the most commonly used form of arbitrage.

For example, if you notice that the price difference between May and July exceeds the normal delivery and storage costs, you should buy the soybean contract in May and sell the soybean contract in July. After that, when the July soybean contract is closer to the May soybean contract and the price difference between the two contracts narrows, you can make a profit from the change of the price difference. Cross-month arbitrage has nothing to do with the absolute price of goods, but only with the trend of price difference in different delivery periods.

Specifically, this arbitrage can be subdivided into three types: bull spread, bear market arbitrage and butterfly arbitrage.

Whether it is a forward market or a reverse market, in this case, it is more likely to sell near-month contracts and buy forward contracts for arbitrage. We call this arbitrage bear market arbitrage. When carrying out bear market arbitrage, it should be noted that if the price of the recent contract is too low to deviate further from the forward contract, it will be difficult to make a profit.

When the market is in a bear market, generally speaking, the contract price in recent months tends to fall more than the longer-term contract price.

If it is a good market, the spread between the forward contract price and the contract price in recent months will often expand; If it is a reverse market, the price difference between the recent contract and the forward contract will narrow.

Whether it is a forward market or a reverse market, in this case, it is more likely to sell near-month contracts and buy forward contracts for arbitrage. We call this arbitrage bear market arbitrage.

When carrying out bear market arbitrage, it should be noted that if the price of the recent contract is too low to deviate further from the forward contract, it will be difficult to make a profit.