Skip to main content
No. of Recommendations: 4
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.

Jim
Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.