Inter-period arbitrage of contracts refers to constructing trading positions with the same quantity but opposite directions in different contract months of the same futures variety, ultimately obtaining profits through hedging or completing transactions at delivery.
The contracts of the same commodity with different delivery months have reasonable relationships or correlations in their prices, which may stem from factors such as seasonality, supply and demand, inventory, and costs. Once this relationship deviates, arbitrage opportunities arise, such as buying a low-priced contract in one delivery month and selling a high-priced contract in another delivery month to obtain risk-free profits.
There are various arbitrage methods. The simulation delivery method calculates the costs of simulated delivery arbitrage and closes positions for profit when the price spread returns to a reasonable range. The cointegration test method checks for cointegration between two sequences; if a relationship exists, arbitrage can be conducted. The price spread method observes the fluctuations of futures contract price spreads, aiming to build positions for profit from the price difference and concluding trades through hedging or delivery.
The timing for opening and closing positions can also be categorized into long-term and short-term. For long-term arbitrage, open long positions below the moving average about six months before the delivery month, and close positions with a profit backtest of around 30%. For short-term arbitrage, open positions below the daily average in a trend of widening price spread and close positions above the daily average.
It should be noted that while the risk of inter-period arbitrage is low, reasonable stop-loss measures are essential. The choice of long or short arbitrage and the timing of opening and closing positions should be based on one's own judgment and market conditions.
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