SUPPLY, DEMAND, AND HANDY CURVES
Futures contracts trade on a curve. And the
shape of that curve could help “shape” your
trades. Because futures are contracts for a
future delivery date—one month out, six
months out, one year out—the shape of the
curve can reflect the market’s overall bias.
Futures contracts trade at different prices
for different months. And that price is based
As an example, if
you look at crude’s
futures curve, the
curve is determined by things
like supply and
costs, and interest
curve is available
on your thinkorswim® platform from
TD Ameritrade. Click on the Charts tab,
then Product Depth. Enter the futures
symbol in the symbol box, click “Futures,”
then “Curves.” To make things look less
busy, you could filter out some of the futures
series. Because the curves are based on
speculation, the further out you look, the
less certainty. And that means higher prices
in the longer term, which is what is going
on in the futures curve of /CL in Figure 1. It
slopes upward. When the shorter-term out-
look is more uncertain than the longer term,
the futures curve begins to slope down.
The shape of the curve is not about the
direction of price movement. It has more to
do with the rate at which demand is growing faster than supply, or supply is growing
faster than demand. When the spread between the spot and future’s price is rising,
oil prices typically increase. And when the
spot/future spread starts narrowing, prices
Keep in mind that a price curve’s shape
can move dramatically based on the underlying’s price. And nearby months tend to be
more responsive to the market’s supply and
demand than futures prices further out.
Besides supply and demand, changes in
inventory reports, geopolitics, and fundamentals can stir up vol in various futures
markets. So, if vol goes higher and the futures curve gets steeper, it can mean a lot
of market uncertainty. You can sometimes
leverage this type of information in a trade.
Your goal is not to speculate on the di-
rection of oil prices. Instead, by looking at
vol and the futures curve, you can start to
analyze futures by analyzing the relation-
ships between contracts. You may want to
consider trading calendar spreads, which
is an alternative strategy to purchasing the
long future. Futures calendar spreads are
different than options calendar spreads
in that they speculate on the relationship
between the near-term and longer-term
On the thinkorswim platform, you can
chart the futures spreads (Figure 2).
1—From the Trade page, type in the futures
2 —Select “Futures,” and choose to list all
3 —Select “Calendar” from the spread
4—Expand the contract you’re interested in,
right-click on the spread you’re considering,
select the “More Info” option, and then Charts
(see Figure 3).
Spreads are charted by subtracting the
farther-out month’s price from the closer
month’s price. And if those spreads continue to widen with increased vol, it may be
time to pay close attention. Would you sell
the longer-term contract and buy the near-er-term one?
HEAR ALL, SEE ALL
Separate from the fate of the dollar, consider
a similar analytic approach when factoring
in potential changes and market turbulence.
Don’t get hung up on headlines. Instead, look
at those news ripples, refine that information, and figure out how to use it to create
a trade. Determine which futures will be
impacted, then review their vol, the futures
curve, and spreads between contracts to
make a more informed decision.
Jayanthi Gopalakrishnan is not a representative of
TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the
author and may not be reflective of those held by
TD Ameritrade, Inc.
Futures and futures option trading is speculative
and is not suitable for all investors. Please read the
Risk Disclosure for Futures and Options prior to
trading futures products. Futures accounts are not
protected by the Securities Investor Protection Corporation (SIPC). Futures and futures options trading services provided by TD Ameritrade Futures &
Forex LLC. Trading privileges subject to review and
approval. Not all clients will qualify.
For more information on the risks of trading and
futures, please see page 37, #1 & 3.
FIGURE 3: Trading calendar spreads in futures. Charting the spreads allows you to see if the
spread between two contracts is increasing or decreasing. Would you buy the shorter-term
contract and sell the longer-term one, or vice versa? Source: thinkorswim® from TD Ameritrade. For illustrative
Open a futures account.
For qualified accounts,
you’ll need Tier 2 options
approval to trade futures
and Tier 3 to trade options
on futures. Log in to your
account at tdameritrade.
com. Under the Trade tab,
select Futures Trader to
access charts, quotes, and