Crude Oil Futures Contracts Expiry (for 'rhodytrader')

Beginner Questions
1

Hi John,

I KNOW you’re the person to ask about this (and I’m posting my question here as opposed to PM’ing you because your answer will benefit all).

I noticed something yesterday (or the day before):

At one of my brokers (up until yesterday or the day before) I could trade the June '08 crude oil futures contract AND / OR the July '08 crude oil futures contract. I noticed that the June '08 contract had a price of let’s say $126 and the July '08 contract had a price of let’s say $135 at a certain time during the day (I cannot recall the exact figures right now so the prices I’m quoting are for example only BUT suffice to day there was a HUGE difference between the prices of the two contracts). My question is this: what would have happened IF I bought the June '08 contract at $126 (let’s say just before the expiry of the June '08 contract) while the July '08 contract was sitting at $135??? What would have (could have) happened to the open position??? I’d find it hard to believe that it would be ‘rolled over’ to the July '08 contract with an IMMEDIATE $9 gain!!! That’s why I’m asking.

3

Rhody may want to supplement this, but hope you don’t mind if I field the question a bit:

Contracts don’t “roll” - they expire. Depending on the market traded, expiry (i.e. monthly, quarterly) will dictate how many contracts may be in trade at one time, although there is always a front month, i.e. a contract month that receives the lions share of volume. If you are long a Crude Oil June '08 contract (CLM8), at the closing of the session on the last trading day (delivery date) in May, prepare to pony up the dough to cover, because you entered an obligation (a “contract”) when you went long to take delivery of a cash commodity in exchange for a specific price. Most traders, as you can imagine, sell prior to expiration.

4

Hi,

Thanks for the response. Of course I don’t mind!!! It’s just that every time I ask a question about the futures John ‘jumps in’ and ‘set me right’ is all.

Thanks again.

Now I’ve ‘kinda’ read something along the lines of what you say (in John F. Carter’s book if I recall) i.e. something along the lines of ‘you don’t have to worry because you’re not going to get a couple of tons of Soybeans delivered to your doorstep’ or whatever because the broker takes care of something or the other (LOL)!!! So having said that are you saying that when the contract expires, the broker will reopen the position on the new contract which will then be at a loss???

Sorry: still not sure about this.

The other thing that I noticed this week again on Oil is that the 2016 contract is trading at something like $140 a barrel. What does this mean for Oil??? Does this mean that someone is ‘guaranteed’ TO BE ABLE to buy Oil in 2016 for $140 a barrel???

Sorry again i.e. I know we’ve probably been through this 100 times i.e. I just STILL don’t get it!!!

5

Different contracts have different types of settlement: stock index futures are a financial product with no tangible analog (well, there is, but e.g. 500 physical stock certificates for an S&P 500 contract is cost-prohibitive), so they are cash-settled only. Other products (and this can be with same commodity) may differ, such as crude.

http://www.nymex.com/CL_spec.aspx

Soybeans, on the other hand (under 11102.F):

CBOT - Rules & Regulations

That said, what you might be referring to (haven’t read Carter’s book - is it [I]Mastering The Trade[/I]?) is EFRP. Summarizing it here would probably be more confusing than beneficial for anyone starting out in Forex who may’ve read this far (probably no one, but just in case!), so I’ll refer you to the CMEGroup (CME and CBOT’s new name, recently merged) doc. that covers it more cogently than I can anyway:

http://www.cmegroup.com/rulebook/files/CMECBOTRA0809-3.pdf

Let me know if that’s what you’re thinking of…

I never traded commodity futures, but it’s an interesting arena!

6

Good (Saturday) morning.

Thanks a whole lot (again) for the information.

Yes: the book I was referring to IS in fact ‘Mastering The Trade’. (It’s a very good book and has served me well).

The SCARY part is that I DO (often) trade futures (commodities and the stock index futures) and I’m doing this ‘blind’ as it were!!! (I’ve never had the ‘privilege’ of having a valid trade open at the time of a contract expiry).

I suppose the easiest way to ‘put this to rest in my mind’ (with Oil anyway) is to wait until next month and then just buy one (VERY small) lot just before I’m unable to trade the earlier contract and then just let it rollover and see what happens!!!