23 March 2023
Continuous Contracts for Physical Commodity Traders
RiskAPI has historically provided multiple methods for accessing continuous, back-adjusted futures contract data. These include multiple notations for creating complete time series composed of mathematically combined, discrete contract data sets. Users have had the option to back-adjust this data using arithmetic or proportional roll-date price differences.
Continuous futures contracts combine all intra-year individual contract time series data into a single, uninterrupted set of data, allowing users to perform analysis on long term histories that do not exist due to a lack of trading data for individual monthly contracts. Data from each individual contract is mathematically combined, with each series being combined at a "roll-date" preceding the expiration date of the contract.
For most speculators, these notations work well since they rarely hold a physical commodity contract to expiration. Doing so would result in either a) accepting delivery of the underlying physical commodity (long position) or b) facilitating the delivery of the underlying physical commodity (short position). However, for physical traders and real hedgers, holding a contract to expiration is desirable and is done explicitly to take advantage of the delivery features of a physical commodity contract. Typically, periods just prior to and up-to physical commodity futures expiration contain higher volatility due to the price and liquidity dynamics involved in the expiration/delivery process. Risk managers of physical commodity trades therefore wish to capture this additional volatility in their analysis.
RiskAPI now includes two additional futures contract symbol notations allowing users to employ continuous contract data with discrete contracts joined (or "rolled") at each contract expiration date. The resulting continuous data set, therefore, also incorporates the unique price dynamics inherent to delivery and expiration.
Continuous contracts rolled at expiration can be accessed by a simple combination of an "E1-E20" suffix or "P1-P20" suffix. For example, the symbol "CLE3" represents the 3rd continuous CME WTI Crude Oil contract, with individual monthly contract data joined and rolled at each respective contract expiration date. To avoid introducing artificial volatility due to price differences at the roll dates, data is back adjusted using arithmetic differences between each contract at the roll dates. Using the format "CLP3" instead will produce an analogous data set, with the back-adjustment using proportional (i.e. percent) differences between the contracts at each roll date.