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Futures Contract Specifications - How long is the life of a contract ?


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Futures Contract Specifications - How long is the life of a contract ?

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  #1 (permalink)
Market Wizard
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I was consulting the CME web site today and noticed that the contract specifications for the ES was showing these values:

If you look at the "First Trade/Last Trade" column you'll note one year of difference for a contract duration. Is this an error ? I thought the duration of a contract was 3 months (90 days) for the ES but here for the ESZ10 we have a duration of 450 days (09/18/2009 to 12/17/2010).

What did i miss again ?

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The further out months exist, and you can trade them, but the liquidity is poor.
You have 3 months from the day the contract becomes officially the front month for liquidity which is reflected in volume and open interest. Trade only the near by.

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trendisyourfriend View Post
I was consulting the CME web site today and noticed that the contract specifications for the ES was showing these values:

If you look at the "First Trade/Last Trade" column you'll note one year of difference for a contract duration. Is this an error ? I thought the duration of a contract was 3 months (90 days) for the ES but here for the ESZ10 we have a duration of 450 days (09/18/2009 to 12/17/2010). What did i miss again ?



If the life cycle of a futures contract was only 3 months, you would not be able to trade calendar spreads. At any moment for ES there are five months in the "March Quarterly Cycle", this can be seen under contract specifications.

The ES chart below shows the five months. You will notice that the current front month ES 12-10 has the highest liquidity, and that the next back month still has acceptable liquidity. The last two months are definitely untradeable.

ES shows a nice backwardation, as the basis of the contract is negative. This is due to dividend expectations being higher than interest rates. ES therefore trades at a discount to the S&P 500 index. The backwardation can be observed for the whole year.

Now this is not the case for all futures contracts. For example, if you take FDAX, the dividends are directly reimputed to the the index via purchase of the components stocks. Unlike ES, FDAX is a total return index. So FDAX does not show backwardation but a contango. If you look at the FDAX chart below, you can see that the front month contract has a lower value than the back month contracts, which is the opposite of ES. The holder of the futures position has the advantage of having lower financing costs to purchase the component stocks at expiry, and as the divdend are reimputed to the index, there is no disadvantage as shown for ES. THe holder of the futures position is indirectly entitled to the dividends, and therefore the back months of FDAX trade at a premium.

Back months are more important for commodities that have an active cash market, so many commercials and large traders hold calendar spreads for them. An exception would be GC, as the calendar spread only reflects interest rates. The market is therefore always in contango (unless interest rates are negative).

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Name:	ES 12-10 (Daily) _ ES 03-11 (Daily) _ ES 06-11 (Daily) _ ES 09-11 (Daily) _ ES 12-11 (Daily) _ ^.png
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Name:	FDAX 12-10 (Daily) _ FDAX 03-11 (Daily) _ FDAX 06-11 (Daily)  21_09_2010 - 12_11_2010.png
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So technically speaking i can trade the same contract for 450 days consecutively. I wonder if Zen-Fire gives access to these contracts that have expired ?

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trendisyourfriend View Post
So technically speaking i can trade the same contract for 450 consecutively days. Does Zen-Fire give access to these dying contracts ?

The contracts are not dying, it is rather a pregnancy.

It is the front month contract that dies. As with humans contracts tend to increase the weight during their life cycle.

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trendisyourfriend View Post
So technically speaking i can trade the same contract for 450 consecutively days. Does Zen-Fire give access to these dying contracts ?

Other way around --- you cannot trade an old "dying" contract past its expiration. But, you can trade a front month contract several months (1 year) out from the present contract.

If you have a position on in ES 12-10 (ESZ10) you'll be forced to close that position at the end of December. You cannot carry it into January 2011. Whereas you could buy ESZ11 (1 year out) and not need to close that position for a year, but the disadvantage is the spread (low liquidity).

Mike

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Big Mike View Post
Other way around --- you cannot trade an old "dying" contract past its expiration. But, you can trade a front month contract several months (1 year) out from the present contract.

If you have a position on in ES 12-10 (ESZ10) you'll be forced to close that position at the end of December. You cannot carry it into January 2011. Whereas you could buy ESZ11 (1 year out) and not need to close that position for a year, but the disadvantage is the spread (low liquidity).

Mike

Was not aware of this disposition Mike, thanks for the clarification. So from a daytrader's perspective, a contract only lasts 90 days. Do i need to be concerned by anything else ?

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trendisyourfriend View Post
Was not aware of this disposition Mike, thanks for the clarification. So from a daytrader's perspective, a contract only lasts 90 days. Do i need to be concerned by anything else ?

Most likely - Not really - but depends on your method.

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Btw, ES is 3 months but commodities like CL are only 1 month, and don't ever screw up and hold CL past expiration because it will show up in barrels of oil on your driveway lol

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November 14, 2010


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