A friend suggested I find out if backwardation or contango affected Nadex trading of binaries or spreads since they use futures contracts. Despite my attempts to grasp the concept it was hard to understand. When you have time can you help with general understanding of these concepts and comment on how these are / aren’t considerations for our trading?
Backwardation and Cantango
darrell
#2
Usually the longer dated future will cost more due to cost of say storage of pigs, corn, gold etc… or due to interest being priced in etc…
However, say the swine flue breaks out or there is a drought then the product may come into more or less demand immediately and cause what is called "backwardation or cantango) - ie front month corn is more expensive as there is a fear there won’t be as much later on so commercials are buying it up to have enough for cereal fuel etc…
Note this means the front month is more expensive than the back month…but it does not mean it will say rise - as they both could fall just the back month may fall faster therefore the front month would be more expensive.
It in now way affects your trading on Nadex…if it goes up buy…if it goes down sell
This is only an important thing to know if you are doing what is called spread trading say a front month future against a back month future contract. Not a “nadex spread” which is more of an option with two strikes (floor/ceiling) on same month.
All markets only follow one month on nadex so this is not a factor when trading nadex.