Choosing Derivative Contracts Across Expiries and Term Structures
Summary
The document asks how quantitative strategies can compare derivatives with different expiries, prices, and volatility characteristics, using commodity futures as an example. It highlights a limitation of applying a single-price time-series method, such as a moving average, across a collection of distinct contracts. One suggested approach is to model each contract independently; another is to fit an equilibrium relationship that links spot and futures prices or related contracts. Interest-rate term structures and covered interest parity are offered as examples of relationship-based frameworks.
A second response notes that derivative behavior can change near expiration and suggests valuation tools such as Greeks and Black–Scholes for comparing contracts. It also cautions that moving averages may not answer which expiry is preferable. These are broad suggestions rather than a tested selection procedure: the document gives no data, implementation details, trading results, or comparison of methods, and the appropriate model depends on the derivative and market.
Key ideas
- Derivative contracts with different expiries have distinct price and volatility histories.
- One approach is to model each contract separately.
- An equilibrium model can impose relationships among spot and futures prices or across contracts.
- Term structures and covered interest parity are examples of frameworks that link related prices.
- Valuation measures may help compare contracts, while a moving average alone may not determine which expiry to select.
Tags
Full text
# Quantitative Derivatives Trading vs. Time # Quantitative Derivatives Trading vs. Time Most quantitative investment strategies focus on the changing prices of a commodity or equity over time. Derivatives, however, make this more complicated. How can I apply quantitative strategies to something that is not a single product with a single price, but rather separate products for each month (each with their own price and volatility)? For example, how should I know whether I should be buying an orange futures contract for July 2011 rather than July 2012? Additionally, how could I apply formulas such as a moving average to all of these different prices? Thank you for bearing with me to answer such a fundamental question, I feel like most quantitative strategies I have read about are in an equity context. ## Answer by Ram Ahluwalia (score 3) https://quant.stackexchange.com/a/1092 Best approach is to model each contract separately, or to develop an equilibrium model that constrains the relationship among the various spot and futures contracts. So if you estimate you can make inferences about the other contracts. The term structure of interest rates or covered interest parity would be examples of the latter. ## Answer by Vass (score 3) https://quant.stackexchange.com/a/1093 The time behavior of derivatives do not resemble that of commodity or equity towards the end of their life time. Before the expiry date of a derivative there are correlaion models that can be used in both areas, but for your question in making choices between options... I have practical experience with stocks and sports betting, but not derivatives. Regardless, it looks like sports betting approaches are similar in making choices. Moving average does not really help in making choices, and in general all sort of Markovian online learning models. Traditional derivatives tools like the Greeks, Black-Scholes and other methods look at the history of the data and come out with measures for the futures which is better in your case. Then you can compare values and chose accordingly.
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