Futures Strip
What Is a Futures Strip?
A futures strip is the buying or selling of futures contracts in sequential delivery months traded as a single transaction. This is most common in the energy futures market.
Understanding Futures Strips
Futures strips are commonly used to lock in a specific price for a targeted time period, which can be very helpful according to an activity's point of view. For instance, a futures strip could be bought to lock in a specific price for natural gas futures for a year with 12 month to month contracts associated into a strip. The average price of these 12 contracts is the specific price that traders can execute at, and can be an indicator of the heading of natural gas prices.
An investor might decide to utilize a futures strip to lock in the price of natural gas for a year as opposed to rolling over their trade and repurchasing another futures contract each time a shorter-term futures contract lapses. Contingent upon the market, rolling over the trade can produce higher trading costs and, surprisingly, negative cash flows assuming the next futures contract is more costly than the one that is lapsing (contango).
Futures strips are every now and again traded in the energy market and there are even options on strips. Traders use them to hedge and estimate on future price developments in oil, natural gas, or other commodity markets. A futures strip is some of the time called a "schedule" strip and can be held long in the event that an investor is hedging against (or guessing on) rising prices in the underlying market, or held short assuming the investor is hedging against (or hypothesizing on) falling prices in the underlying market.
Features
- Futures strips are the buying or selling of futures contracts in sequential delivery months.
- Futures strips frequently trade in the energy market.
- They are normally used to lock in prices for specific time periods.
