11/25/2017 How to leverage market contango and backwardation | Futures Magazine

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How to leverage market contango and

backwardation
Commodities Equities Bonds Forex

By Jean Folger

February 1, 2013 • Reprints

Symbol Last Change (%)

Emini 2601.00 +4.00 (+0.15%)

Euro 1.19395 +0.00765 (+0.64%)

Understanding consequences
Gold 1288.0 −2.7 (−0.21%)
In general, speculators often are long if a contract is trading in backwardation, and short if it is Oil 58.97 +0.41 (+0.70%)
trading in contango. Keep in mind, however, these market states can and do change. One of
the more well-known examples of the potential negative e ects of contango and Gas 2.827 −0.072 (−2.48%)
backwardation is the case of Metallgesellschaft AG (MG), a former German metals and oils Corn 354'4 −2'0 (−0.56%)
conglomerate.
Quotes by TradingView
Quotes

In late 1993 and early 1994, MG’s American a liate, MG Re ning and Marketing Inc. (MGRM),     
reported losses on positions in energy futures and swaps. The company had been using a
We Asked Traders more >>
hedging system that relied on normal backwardation markets for pro ts. What the company
did not expect was a shift to contango, which ultimately led to losses of about $1.3 billion. After We asked traders for their
MGRM’s catastrophic losses, a $1.9 billion rescue e ort led by more than 100 German and opinion on the launch of
international banks prevented MG from going into bankruptcy.  bitcoin futures
Contango and backwardation, however, are not necessarily good reasons to stay out of a
market. Investors and traders should be aware of these dynamic market states and
understand that just because a market is in backwardation right now, doesn’t mean that it Sponsored Content
won’t soon be trading in contango. 
Trading
Contango and backwardation, while exotic sounding, are normal conditions in futures markets. Equities.com launches
Investors and traders can maintain awareness of these market states by evaluating the spot unlimited trading via
price of an underlying and the prices of near and far futures contracts. Tradier Brokerage,
Transforming into a news
Jean Folger is the co-founder of, and system researcher at, PowerZone Trading LLC. She can be & fintech portal
reached at www.powerzonetrading.com.
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