NG - NatGasCalendar Spread

 
The above calendar months spread for NATGAS shows the across 4 different months produce different changes despite the movements are "similarly same". 

Choosing the appropriate months is to yield a balance of capital utilization versus returns. 

 

RELATIVE 

There are a few different possible actions or motions of 2 different objects i.e (A) and (B)

1. (A) and (B) can move in the SAME direction but one is moving faster than the other leaving one ahead and the other behind

2. (A) and (B) can move in OPPOSITE direction and both moving further apart

3. DIFFERENT direction where one is STATIONARY (STATIC) and the other moves away.        

4. MOVE IN TANDEM

Spread value in financial markets refer to the DIFFERENCE (GAP value) between 2 different selected instruments. The spread value change will depend on "1" - "2" - "3" action above. "4" spread value NO CHANGE.

 

For the ease of understanding, I have always use the pair A-B, with the front as the "BUY" and "SELL" corresponding to the opposite for back pair. ie. (+) A = B (-) and (-) A= B (+)

IF we BUY the spread, it means the SPREAD value is expected to go UP and if we SELL the spread, it means we expect the SPREAD to drop.

 

This is NOT rocket science but the MCE/"O levels" Physics conceptswhich I was learnt in the late 70s is now applied to financial markets.

 

The obvious question that most readers will ask is, how do we know the spread is going to go up or down? 

Are there "traits" that are consistent in the long term?

How often do the Spread and the Futures move in same direction? All the time? Sometime? How about opposite direction?

Irrespective whether it is CALENDAR Spread within the same instrument or products OR inter-commodity spread for 2 different class or group,  the concept remains the same