mumrix: True calendar spread

The meaning and use of Calendar Spread

A futures calendar spread is the difference in price between the current rolling contract and the next rolling contract. The spread is essentially a premium for the newer contract against the expiring contract to compensate for costs associated with holding the contract, mainly the short term interest rate. Forthcoming earnings in underlying shares will have the opposite effect and create a negative premium. Sometimes calendar spreads are called switch or switches reflecting the fact that it's the contract price difference associated with maintaining a futures position though rollover by switching contracts. There could be different reasons to why you want to account for the calendar spread. A trader or investor who wishes to switch a futures position would typically want to gauge the calendar spread so as to avoid slippage. On the other hand, an options or futures trader who wishes to employ a so called calendar spread strategy would typically want to exploit the calendar spread and take advantage of the time decay factor.

Rollover date and volume

For more analytical purposes the calendar spreads are important when looking at historical data of expired contracts. When building a composite volume profile it's essential to have prices and their associated volumes equalized between contracts with different expiration dates. To account for the gap created at rollover, all historical data has to be equalized by calendar spreads. That enables prices at volume data of expired contracts to be aggregated to one and another and eventually into the current rolling. Compensating for the spread defined by difference of closing prices at rollover is most common and used by DTNIQ to create equalized data for their back adjusted continuous symbols. The concept of rollover date is a remnant from open outcry trading where it's important that everyone in a particular pit trades the one and same rolling at a time. In electronic markets there may be semi-official rollover dates available as a form of convention. For contracts that expire every three month, rollover date is usually eight trading days before expiration, though volume tends to shift later into the expiration week. For contracts that shifts monthly like the OMXS30 future, volume usually shifts just one or two days before expiration.

Calculation of Calendar Spread

So how should we calculate the spread as to reflect the true spread in the best possible manner? What I would call Nominal calendar spread is the spread of closing prices at rollover date as described above. However, since contracts with lower liquidity sometimes will have erratic closing prices, especially during expirations week and even more so when futures and options expiration coincides, a discretionary decision process for determining the real split value could be considered. True calendar spread would stand for an estimated price spread which is perceived to be closest to a theoretical calendar price spread. A method to determine the real calendar spread closest to the theoretical might be a pair's chart showing the continuous difference between current rolling contract to expire and the next rolling contract the last couple of days preceding the rollover date. Looking at a moving average of the spread is the most straightforward method but more precise and accurate could be a profile where the POC indicates the true calendar spread value. This method is also applicable on historical data to check for errors and misrepresented rollovers. This process will be used to determine the true calendar spread as new contracts expire. Nominal calendar spread values used previously will also be re-examined beginning with the most recent. Table below shows an example of how nominal and true calendar spreads with associated adjusted closing values can be organized to check for errors in previously made adjustments. Se notes for further explanations.

Table (no longer updated, see notes)

Month	Code	Contract***	Date	Close**	Nominal calendar spread	Nominal adjusted close	True calendar spread*	True adjusted close
Oct	V	OMXS30 V2008-OMF	10/15/2008	679.00
		OMXS30 X2008-OMF	10/15/2008	681.75	2.75	601.75		672.25
Nov	X	OMXS30 X2008-OMF	11/19/2008	598.50
		OMXS30 Z2008-OMF	11/19/2008	598.25	-0.25	518.50		591.75
Dec	Z	OMXS30 Z2008-OMF	12/17/2008	666.00
		OMXS30 F2009-OMF	12/17/2008	665.25	-0.75	586.25		659.25
Jan	F	OMXS30 F2009-OMF	01/21/2009	615.25
		OMXS30 G2009-OMF	01/21/2009	614.00	-1.25	536.25		608.50
Feb	G	OMXS30 G2009-OMF	02/18/2009	651.50
		OMXS30 H2009-OMF	02/18/2009	651.50	0.00	573.75		644.75
Mar	H	OMXS30 H2009-OMF	03/18/2009	660.00
		OMXS30 J2009-OMF	03/18/2009	646.00	-14.00	582.25		653.25
Apr	J	OMXS30 J2009-OMF	04/15/2009	725.50
		OMXS30 K2009-OMF	04/15/2009	710.75	-14.75	661.75		718.75
May	K	OMXS30 K2009-OMF	05/13/2009	744.00
		OMXS30 M2009-OMF	05/13/2009	744.00	0.00	695.00		737.25
Jun	M	OMXS30 M2009-OMF	06/16/2009	790.25
		OMXS30 N2009-OMF	06/16/2009	790.25	0.00	741.25		783.50
Jul	N	OMXS30 N2009-OMF	07/15/2009	820.00
		OMXS30 Q2009-OMF	07/15/2009	822.00	2.00	771.00		813.25
Aug	Q	OMXS30 Q2009-OMF	08/19/2009	868.25
		OMXS30 U2009-OMF	08/19/2009	869.50	1.25	817.25		861.50
Sep	U	OMXS30 U2009-OMF	09/16/2009	917.75
		OMXS30 V2009-OMF	09/16/2009	918.00	0.25	865.50		911.00
Oct	V	OMXS30 V2009-OMF	10/14/2009	929.50
		OMXS30 X2009-OMF	10/14/2009	929.75	0.25	877.00		922.75
Nov	X	OMXS30 X2009-OMF	11/18/2009	966.25
		OMXS30 Z2009-OMF	11/18/2009	966.75	0.50	913.50		959.50
Dec	Z	OMXS30 Z2009-OMF	12/16/2009	959.25
		OMXS30 F2010-OMF	12/16/2009	959.25	0.00	906.00		952.50
Jan	F	OMXS30 F2010-OMF	01/20/2010	957.25
		OMXS30 G2010-OMF	01/20/2010	957.00	-0.25	904.00		950.50
Feb	G	OMXS30 G2010-OMF	02/17/2010	943.75
		OMXS30 H2010-OMF	02/17/2010	943.75	0.00	890.75		937.00
Mar	H	OMXS30 H2010-OMF	03/17/2010	1023.50
		OMXS30 J2010-OMF	03/17/2010	1012.75	-10.75	970.50		1016.75
Apr	J	OMXS30 J2010-OMF	04/14/2010	1050.00
		OMXS30 K2010-OMF	04/14/2010	1037.50	-12.50	1007.75		1043.25
May	K	OMXS30 K2010-OMF	05/19/2010	966.75
		OMXS30 M2010-OMF	05/19/2010	960.00	-6.75	937.00		960.00
Jun	M	OMXS30 M2010-OMF	06/16/2010	1045.75
		OMXS30 N2010-OMF	06/16/2010	1046.25	0.50	1022.75		1039.00
Jul	N	OMXS30 N2010-OMF	07/14/2010	1064.25
		OMXS30 Q2010-OMF	07/14/2010	1069.00	4.75	1040.75		1057.50
Aug	Q	OMXS30 Q2010-OMF	08/18/2010	1056.50
		OMXS30 U2010-OMF	08/18/2010	1057.50	1.00	1028.25		1049.75
Sep	U	OMXS30 U2010-OMF	09/15/2010	1082.25
		OMXS30 V2010-OMF	09/15/2010	1082.00	-0.25	1053.00		1075.50
Oct	V	OMXS30 V2010-OMF	10/13/2010	1105.00
		OMXS30 X2010-OMF	10/13/2010	1107.00	2.00	1076.00		1098.25
Nov	X	OMXS30 X2010-OMF	11/17/2010	1086.50
		OMXS30 Z2010-OMF	11/17/2010	1087.75	1.25	1055.50		1079.75
Dec	Z	OMXS30 Z2010-OMF	12/15/2010	1154.50
		OMXS30 F2011-OMF	12/15/2010	1156.50	2.00	1122.25		1147.75
Jan	F	OMXS30 F2011-OMF	01/19/2011	1154.25
		OMXS30 G2011-OMF	01/19/2011	1155.75	1.50	1120.00		1147.50
Feb	G	OMXS30 G2011-OMF	02/16/2011	1128.75
		OMXS30 H2011-OMF	02/16/2011	1130.50	1.75	1093.00		1122.00
Mar	H	OMXS30 H2011-OMF	03/16/2011	1056.00
		OMXS30 J2011-OMF	03/16/2011	1037.00	-19.00	1018.50		1049.25
Apr	J	OMXS30 J2011-OMF	04/13/2011	1136.00
		OMXS30 K2011-OMF	04/13/2011	1124.00	-12.00	1117.50		1129.25
May	K	OMXS30 K2011-OMF	05/18/2011	1158.00
		OMXS30 M2011-OMF	05/18/2011	1160.25	2.25	1151.50	2.00	1151.25
Jun	M	OMXS30 M2011-OMF	06/15/2011	1086.50
		OMXS30 N2011-OMF	06/15/2011	1087.00	0.50	1077.75	1.75	1077.75
Jul	N	OMXS30 N2011-OMF	07/13/2011	1106.00
		OMXS30 Q2011-OMF	07/13/2011	1108.50	2.50	1096.75	1.75	1095.50
Aug	Q	OMXS30 Q2011-OMF	08/17/2011	959.00
		OMXS30 U2011-OMF	08/17/2011	961.75	2.75	947.25	1.50	946.75
Sep	U	OMXS30 U2011-OMF	09/14/2011	886.25
		OMXS30 V2011-OMF	09/14/2011	886.50	0.25	871.75	1.50	872.50
Oct	V	OMXS30 V2011-OMF	10/19/2011	942.75
		OMXS30 X2011-OMF	10/19/2011	944.00	1.25	928.00	1.25	927.50
Nov	X	OMXS30 X2011-OMF	11/16/2011	960.50
		OMXS30 Z2011-OMF	11/16/2011	961.50	1.00	944.50	1.50	944.00
Dec	Z	OMXS30 Z2011-OMF	12/14/2011	940.50
		OMXS30 F2012-OMF	12/14/2011	942.00	1.50	923.50	2.00	922.50
Jan	F	OMXS30 F2012-OMF	01/18/2012	1026.50
		OMXS30 G2012-OMF	01/18/2012	1027.00	0.50	1008.00	0.50	1006.50
Feb	G	OMXS30 G2012-OMF	02/15/2012	1082.25
		OMXS30 H2012-OMF	02/15/2012	1084.50	2.25	1063.25	1.75	1061.75
Mar	H	OMXS30 H2012-OMF	03/14/2012	1116.50
		OMXS30 J2012-OMF	03/14/2012	1098.50	-18.00	1095.25	-17.50	1094.25
Apr	J	OMXS30 J2012-OMF	04/18/2012	1036.00
		OMXS30 K2012-OMF	04/18/2012	1018.50	-17.50	1032.75	-16.75	1031.25
May	K	OMXS30 K2012-OMF	05/15/2012	998.50
		OMXS30 M2012-OMF	05/15/2012	998.50	0.00	1012.75	1.50	1010.50
Jun	M	OMXS30 M2012-OMF	06/13/2012	976.75
		OMXS30 N2012-OMF	06/13/2012	978.00	1.25	991.00	1.50	987.25
Jul	N	OMXS30 N2012-OMF	07/18/2012	1032.00
		OMXS30 Q2012-OMF	07/18/2012	1034.00	2.00	1045.00	1.25	1041.00
Aug	Q	OMXS30 Q2012-OMF	08/15/2012	1075.50
		OMXS30 U2012-OMF	08/15/2012	1077.50	2.00	1086.50	2.00	1083.25
Sep	U	OMXS30 U2012-OMF	09/19/2012	1107.00
		OMXS30 V2012-OMF	09/19/2012	1109.75	2.75	1116.00	1.50	1112.75
Oct	V	OMXS30 V2012-OMF	10/17/2012	1075.25
		OMXS30 X2012-OMF	10/17/2012	1077.00	1.75	1081.50	1.25	1079.50
Nov	X	OMXS30 X2012-OMF	11/14/2012	1053.50
		OMXS30 Z2012-OMF	11/14/2012	1056.75	3.25	1058.00	1.75	1056.50
Dec	Z	OMXS30 Z2012-OMF	12/19/2012	1110.00
		OMXS30 F2013-OMF	12/19/2012	1111.25	1.25	1111.25	1.00	1111.25
Jan	F	OMXS30 F2013-OMF	01/16/2013	1130.75
		OMXS30 G2013-OMF	01/16/2013	1130.75	0.00	1130.75	0.25	1131.00

* The table has not been updated for a while for two reasons. Prices are now (May, 2013) at 5 years highs and the available historical data does not cover prices above the high of 05/11/2011 which makes older data in the composite less important at the moment. The other reason is that the closing prices in the table of which nominal calendar spreads are calculated are based on last price at 17:30 while it should be 17:28 (17:27 until 09/27/15) when the call has been executed and after hours trades are allowed which can affect last price of calendar day. Regular trading stops at 17:25 for the call interaction to begin which lasts for a random time interval between 150-180 seconds (90-120 seconds until 09/27/15) whereafter remaining orders are executed and closing price determined (uncross). True calendar spreads based on POC (point of control) of contract price difference over time are not affected by how closing prices are determined and will be posted as usual before opening call one day before expiration.

** Use the split function (Menu: File - Functions - Adjust for splits) for adjusting the data. Columns with adjusted close (nominal/true) shows values with accumulated spreads (nominal/true) and can be used to track historical data for errors. If you wish to correct a split made previously, just place the current value (which may coincide with close adjusted by nominal calendar spread) to the left and the desired value (for example close adjusted by true calendar spread) to the right. In order to correct previously made adjustments by the table above you have to have made the adjustments at Wednesday close two days before expiration and start with the latest. If not, you have to know the adjustment value used previously or with what value the adjustment was made. This will end up with just one or two trading days with the inaccurate adjustment but with the larger part of the composite in proper alignment with the true calendar spreads. It's also possible to recreate the previously made adjustment if you have access to extended intraday historical data and know to what time the adjustment was made.

*** Expiration occurs the third Friday monthly. eSignal futures symbol format: Contract symbol (OMXS30), a space, month code (January: F, February: G, March: H, April: J, May: K, June: M, July: N, August: Q, September: U, October: V, November: X, December: Z), the last digit of the year (four digits for expired contracts), dash, then the exchange code (OMF for derivatives at Nasdaq OMX Nordic, Stockholm).