Futures traders exploit mispricing in gold spreads

Gold Bars

Traders on gold futures were quick to seize an arbitrage opportunity created by hedgers of the yellow metal. A rollover of gold futures positions from April to June and August was happening for the past few days, with April contract expiry due on the fifth of next month. The trade happened on commodity bourse MCX.

As market participants closed out their buy-sell positions for gold futures in April and created fresh ones in the June and August contracts, the spread between the two months (August and June) dipped to a low of Rs 28 per 10 gm intraday on Wednesday. The spread (premium) between the next and the near month contract is normally Rs 150-170.

Traders interpreted the Wednesday rolls as more sell (than long) positions being rolled over to June and August, with the latter registering more than average rolls seen in a contract next to the near-month. Normally, hedgers sell gold forwards to protect themselves from falling prices.

Traders snapped up the August contract and sold the June contract on hopes of the spread between the two widening.

They ended up purchasing the spread and this seems to have paid with the premium between the two months widening to Rs 95 intraday on Thursday. They will earn maximum if mean reversion takes place –– Aug quotes at an Rs 150-170 premium to June. “We did a calendar spread for our clients on Wednesday, selling June at Rs 32,332 and buying August at Rs 32,360,” said Nitin Kedia, business head, Kedia Commodity Comtrade.

“We are long on the spread as we believe it will widen and our clients will make money.”

Disclaimer: This information has been collected through secondary research and TJM Media Pvt Ltd. is not responsible for any errors in the same.