Just curious, the front month was extremely volatile, while longer-dated contracts like December stayed relatively stable. Does what matters more tend to be volatility at specific tenors, or the volatility of the spread between them, since the latter is what reflects the cost or carry of holding the position?
The front is largely always going to be the main lever through which shortages are expressed. The back will always provide the risk premium for that shortage continuing.
The two ends reflect very different players— the front is primarily real demand + CTA flow requiring big liquidity. The far back is mostly the hedging activity. What matters depends on what you’re playing for and whom you want to profit against.
The front players are hard to “beat”. The back players are willing to lose as it is a form of economic benefit. Strategies need to trade accordingly!
Just curious, the front month was extremely volatile, while longer-dated contracts like December stayed relatively stable. Does what matters more tend to be volatility at specific tenors, or the volatility of the spread between them, since the latter is what reflects the cost or carry of holding the position?
Great question! Both matter.
The front is largely always going to be the main lever through which shortages are expressed. The back will always provide the risk premium for that shortage continuing.
The two ends reflect very different players— the front is primarily real demand + CTA flow requiring big liquidity. The far back is mostly the hedging activity. What matters depends on what you’re playing for and whom you want to profit against.
The front players are hard to “beat”. The back players are willing to lose as it is a form of economic benefit. Strategies need to trade accordingly!