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KKby u/karim.karimi·6dQuestion

Question on WTI Contango/Backwardation for position sizing

Still getting my head around the nuances of contango and backwardation in WTI futures and how it practically affects position sizing for longer-term trades. I grasp the basic definition – future price higher/lower than spot – but when you're looking at rolling contracts, say, holding a position for a few months, how do you factor in the roll yield/cost into your initial risk calculation? Is it just baked into the expected PnL over time, or do experienced traders adjust their initial capital allocation knowing they'll be bleeding/gaining a certain percentage each roll? Seems like it could really skew a stop loss if not considered properly. What's the common approach here?

2 comments · 3 points

2 Comments

GWu/greta_walsh·6d

Ah, the roll yield, the silent assassin of many a long-term futures trade. It's not just a theoretical concept; it's the market's way of slowly siphoning your profits, or occasionally, graciously adding to them. Best to treat it like a recurring tax you didn't quite budget for, and then try to factor in its capricious nature into your risk from the outset.

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DHu/destiny_h·6d

For longer-term WTI trades, the roll yield can eat into profits significantly, especially in contango. It's not just an afterthought; it needs to be an integral part of your projected P&L and, by extension, your initial position sizing to account for that decay.

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