What Is a Futures Strip?
A futures strip is the buying or selling of futures contracts in sequential provide months traded as a single transaction. This is most no longer extraordinary throughout the energy futures market.
Key Takeaways
- Futures strips are the buying or selling of futures contracts in sequential provide months.
- They are usually used to lock in prices for explicit time frames.
- Futures strips perpetually trade throughout the energy market.
Figuring out Futures Strips
Futures strips are usually used to lock in a decided on price for a centered period of time, which can be moderately useful from an operation’s viewpoint. For example, a futures strip could be bought to lock in a decided on price for natural fuel futures for a year with 12 monthly contracts connected proper right into a strip. The everyday price of the ones 12 contracts is the suitable price that buyers can transact at, and can be a trademark of the trail of natural fuel prices. Throughout the Investing for Learners direction, you can be informed additional about how buyers speculate on energy by way of trade traded worth vary (ETFs).
An investor would in all probability make a selection to use a futures strip to lock in the price of natural fuel for a year quite than rolling over their trade and repurchasing another futures contract each time a shorter-term futures contract expires. Depending to be had available on the market, rolling over the trade can generate higher purchasing and promoting costs and even adverse cash flows if the next futures contract is more expensive than the one that is expiring (contango).
Futures strips are regularly traded throughout the energy market and there are even alternatives on strips. Consumers use them to hedge and speculate on longer term price movements in oil, natural fuel, or other commodity markets. A futures strip is sometimes called a “calendar” strip and can be held long if an investor is hedging in opposition to (or speculating on) rising prices throughout the underlying market, or held fast if the investor is hedging in opposition to (or speculating on) falling prices throughout the underlying market.Â
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