As a sanity check, I went back through several years of on-line historical data to look at the differences in the futures roll-overs from the lead contract to the next contract using the ES E-mini futures. The sample of data is listed in the table below. To conduct this study, I used the closing prices on the date which was the fifth day prior to the expiration of the lead contract and compared it to the roll-over contract on the same date. The differences are shown in the right-hand column.
Having followed futures trading for most of the 2000's, it was my observation that the futures roll-overs being a premium of -6 points to +6 points just wasn't much of a problem. It was seemingly pretty much at random, and it was a fairly small percentage of the price level. For example, at 6 points of 1,770 points it was about 0.33% of the price level at the time.
But, after the Covid years, the futures premiums have absolutely exploded. Not only are the numerical levels much larger in absolute value, but in terms of the price level the premiums are now 0.85% to 1.20% of the notional price.
This situation is absurd. First, why does it cost one much, much more to roll a contract now than it did before? As shown above, this is not just a function of the price level. Second, one now needs to consider how this extremely absurd amount of roll-over will affect chart structures (triangles or diagonals in progress, for example) when using the roll-over contracts (typically /ES in ThinkorSwim, or ES1! in TradingView).
I have highlighted this matter before. The point is that the roll-over used to be largely a non-event. And now it has become a major event that has to be managed for some reason. And that reason simply is not clear.
This is the second post since Thursday. Have an excellent rest of the weekend.
TraderJoe
Interest rates are a lot higher and dividends are low.
ReplyDeleteIF that were a factor then, either the roll-contract is priced too high, OR the lead contract is priced too low at the time. There may be nothing that explains this except sheer outright bullishness: institutions are willing to 'pay up' for the privilege of owning stocks because they assume the FED is trapped into supporting the markets or suffer dire consequences. So, they sell the futures at outrageously high prices and buy the stocks in typical arbitrage plays. That's just a guess. I do not have supporting data from Goldman, Blackrock, etc. TJ.
DeleteSo it would lose daily about 0.75 point for next 90 days. I take it
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