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Using Fair Value to Interpret Futures Roll Pricing

Article Quant Q&A · Author: VanillaCall
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Summary

The document asks what practical value a calculated fair value for a futures roll provides when observed roll behavior appears to move against it. The author describes calculating fair roll as the price difference between the front and back contracts and backtesting its signal. In the example, a negative fair roll has coincided with further cheapening as the contract approaches first notice, rather than a reversal toward fair value.

The author reports traders’ explanation that institutional positioning can drive the roll and sometimes make the fair value signal point in the wrong direction. The document offers no calculation method, backtest details, sample size, or answer to the question of how to use fair value. Its main lesson is therefore a caution: a theoretical benchmark may not predict short-term price direction when positioning and delivery-period dynamics affect prices.

Key ideas

  • The author compares a calculated fair roll with subsequent price behavior through backtesting.
  • A roll can continue to cheapen even when its fair value suggests a different direction.
  • Institutional positioning is offered as one possible influence on roll behavior.
  • The document raises, but does not resolve, how fair value should guide trading decisions.

Tags

FuturesBacktestingMarket microstructure
Full text
# How to calculate the fair value of a futures roll and what are the practical uses?


# How to calculate the fair value of a futures roll and what are the practical uses?












Last month, I spent some time calculating the fair value of a futures contract in preparation for the current futures roll period.

I've backtested it and noticed that fair roll generally gives me an opposite signal. For example, if the fair roll (front minus back) is -2 ticks, I've noticed that the roll continues to cheapen more into the first notice period. I've spoken to the traders and they mentioned that sometimes it gives you the wrong direction and it is now driven by positioning data from institutional investors.

What good is using the fair value then?

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.