Time horizon and its impact on returns
Basis APR is annualized: a 1% spread over 30 days becomes 12.2% APR; the same 1% over 90 days is 4.1% APR.
This makes short-dated contracts look more attractive in APR terms, even if the absolute spread is similar.
Be careful comparing APRs across different expiries. The same annualized return requires different absolute spreads.
A 10% APR on a 7-day contract means only 0.19% actual return. A 10% APR on a 90-day contract means 2.5% actual return.
Short expiry (< 30 days): Higher APR but smaller absolute returns. Costs consume a larger percentage of the spread.
Medium expiry (30-90 days): Balance of APR and absolute return. Costs are proportionally smaller.
Long expiry (90+ days): Lower APR but larger absolute returns. More time for costs to accumulate, but also more cushion.
Your choice depends on capital turnover goals. High APR with frequent rolls vs lower APR with longer holds.
Fixed costs (fees, slippage) hurt short-dated trades more. A 0.3% round-trip cost is 5.5% annualized on a 20-day trade.
The same 0.3% cost is only 1.2% annualized on a 90-day trade. Longer holds amortize fixed costs better.
This is why very short-dated basis trades often do not work after costs, even when gross APR looks attractive.
FYOS model_adjusted_basis_apr accounts for this, showing realistic returns that factor in cost impact by expiry.
Holding to expiry guarantees convergence: futures settle to spot, and you capture the basis.
Early exit means closing before settlement. Your profit depends on how much the basis has narrowed.
Basis does not converge linearly. It may widen before narrowing, or narrow faster than expected.
If you might need to exit early, consider that your actual return is uncertain until you close.
Match expiry to your time horizon. Do not enter a 90-day trade if you might need the capital in 30 days.
Consider the opportunity cost. Capital locked in a long-dated trade cannot capture new opportunities.
Diversify across expiries if possible. This smooths returns and provides flexibility.
Watch rollover costs if you plan to chain short-dated trades. Each roll incurs new execution costs.
Not necessarily. Higher APR on short dates often comes with higher cost impact. A 20% APR on a 14-day trade may net less than a 12% APR on a 60-day trade after fees and slippage.
Delivery futures settle at expiry. Your futures position closes automatically at the settlement price, which converges to spot. You receive or pay the settlement amount.
Yes. Before one contract expires, close it and open a new position in the next expiry. This incurs new execution costs, so factor that into your planning.
FYOS shows opportunities across multiple expiry buckets (short, medium, long) with model_adjusted_basis_apr for each. You can filter by expiry to focus on your preferred time horizon.
Longer expiries provide more cushion against cost impact and short-term basis fluctuations. But they lock capital longer and may miss better opportunities that arise. There is no universally "safer" choice.
Compare expiry buckets
FYOS shows opportunities across expiry buckets with realistic cost-adjusted returns. Free beta access.
This content is for educational purposes only. Trading involves risk of loss. Always conduct your own research before making investment decisions.
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