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Subject:  Re: OT: esoteric trade opportunity Date:  4/14/2020  3:22 PM
Author:  mungofitch Number:  277281 of 279325

Since the price gap closes as the dividend year approaches, buying a very long dated contract means you will be waiting quite a long time for the price to converge.
lots of time left on the contract means the gap will still be larger the further out you are when you close it.

You would think so.
But no, it doesn't seem to work that way. At least in the past, including the recent past.

When a crisis hits, all future years seem to be dragged down in parallel.
When optimism returns, all future years seem to rise in parallel.

When people get more sanguine about (say) 2022-2023, you'll likely see all the prices 2024-2029 rising in tandem as well.
So, by going with a long dated contract, you're not relying on things getting better sooner, but still benefit if they do, so it's the smart bet.
You have lots of time for normality to return, but if it comes sooner, you make your profit and close sooner.
It's not a yield curve, it's more of a flat plateau that moves up and down.

As an example, the price on the 2025 is up to about 83 now, up from 69 all of 12 days ago.
There is no sane reason to think that economic news in the last couple of weeks about economic
environment in the next two years would change the outlook for 2025 by any material amount.

So, that article about the "sweet spot" is about playing the fancy stuff back when times were normal.
Maybe it's insightful, but times are not normal now.
It seems more like shooting fish in a barrel, so you don't need to be an ichthyologist.

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