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Calendar Arbitrage by Alexander Demin

Calendar Arbitrage by
Article Posted: 04/26/2017
Article Views: 2317
Articles Written: 9
Word Count: 586
Article Votes: 5
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Calendar Arbitrage

Business,Finance & Investment,Investment

Calendar arbitrage is a tool for committing several opposite transactions at different times to one underlying asset. The calendar arbitrage or the calendar spread allows to increase profitableness and to lower costs. The undoubted advantages of this trading strategy include:

  • automation of the process, which reduces the loss of time;
  • increased profitability;
  • reasonable risk;
  • the ability to perform transactions on a single trading floor.

The scheme underlying the calendar arbitrage is that when the spread spreads between futures, a long-term contract is sold simultaneously and the neighbor is bought, and when it comes to narrowing, there is a purchase of long-distance contracts and the sale of short-term contracts (for more details see here). High profitability and low transaction risk are based on a neutral position relative to the market, which makes it a very attractive way to earn money in the eyes of traders.

Absolute minority of exchange contracts (from 2 to 5%) lead to physical supplies of goods. The remaining 95% of operations change the time frame or are closed. Thus, calendar arbitrage will make the transfer of open positions much easier and cheaper.

What is the basis for the calendar spread?

  1. Different asset values for different bidders. The cost of futures is higher than the price of the underlying asset due to the additional income included in the price.
  2. Market inefficiency.
  3. Equal value of futures assets.
  4. A variety of strategies for bidders.

The acquisition of futures requires much less diversion than buying a basic asset. Instead of acquiring the latter, the funds can be entrusted to the bank and receive interest from them. Over time, the amount of additional income decreases as the expiration date of the futures expires. If we take the stability of the interest rate as a condition, then the spread between futures and spot decreases gradually over time and is compared to zero at the time of futures expiration. In the case of two futures with different expiration terms - near and far - the spread between them remains unchanged throughout the entire time.

However, in reality, the spread is almost never permanent. Speculative activity with two short-term and long-term contracts, differences in bank rates and price jumps in the underlying asset lead to the fact that the spread between futures is constantly changing, which makes it possible to implement calendar arbitrage.

Despite the obvious advantages of applying calendar arbitrage, interested traders face difficulties in implementing it. The effectiveness of the application of the calendar spread can vary significantly at different time periods. It often happens that this strategy justifies itself in just a few months of the year. This is due to the low liquidity of long-term futures - it starts to rise only as the expiration date approaches. High competition negatively affects the effectiveness of calendar arbitrage, as the risk of spread fluctuations in the execution of transactions increases.

The safest period for applying the strategy of calendar arbitrage begins about two months before the expiration of the near future and ends two weeks before it. At this time, the liquidity of long-term futures is rising to the optimal level - it is quite high, but does not reach a peak when the activity of traders starts to influence the implementation of the strategy.

The effectiveness of calendar arbitrage is related to the size of the funds involved. With a reasonable and cautious approach, the strategy can bring up to 150% per annum. To learn more about arbitrage strategies, visit

Related Articles - calendar arbitrage, trading strategy, calendar spread, futures, arbitrage,

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