Traders' Roundtable

I wanted to get anyone's thoughts around a better rolling strategy than just when OI changes. My initial thought is: since the ETFs must begin rolling within 5 days of contract expiration and they are long only that if I am short, I roll as late as possible (ETF rolling should drive down the front and up the back) and if I am long, I roll as early as possible. Does anyone have any thoughts around such thinking? Thanks

Which ETFs are you referring to?

D

You are correct that a majority of the ~$100B in commodity indexes are in long only products like GSCI and DJ-AIG (not all via ETF/ETNs) so knowing those dynamics can help in rollovers but be very careful...

1) Traders are already trading the commodity index rollover effects and now there are even traders having methodologies that exploit the traders exploiting the commodity index rollover impact... Got that - the 2nd order effect is already being exploited.

2) There have been squeezes on simple exploitation of this rollover. I think it was in wheat about 1 or so years ago. There were many articles written about it and I'm sure you can find some on-line. Just a warning that a technique like this can back-fire in a big way.

3) The commodity indexes are evolving. There are now some L/S indexes and as they gain AUM the dynamics of the underlying commodities will change vs long only. Also even in long only indexes the rollovers are being treated very differently now. For example there is a version of GSCI that only trades the December contract of crude if I remember correctly. Others look at contango/backwardation across all contracts to determine which one to use - thus making it a bit more dynamic. You will need to evolve as the asset class evolves and AUM shifts between the flavors of indexes.

On rollovers in general I know a lot of people like to use fixed dates vs OI and perhaps avoiding all commodity index rollover windows is best vs trying to exploit this moving target?

Thanks, SVquant. I agree with you competely but appreciate your reassurance.