What Is a Futures Strip?
- Futures strips are the buying or selling of futures contracts in sequential delivery months.
- They are typically used to lock in prices for specific time frames.
- Futures strips often trade in the energy market.
Understanding Futures Strips
Futures strips are typically used to lock in a specific price for a targeted time frame, which can be quite useful from an operation's point of view. For example, a futures strip could be bought to lock in a specific price for natural gas futures for a year with 12 monthly contracts connected into a strip. The average price of these 12 contracts is the specific price that traders can transact at, and can be an indicator of the direction of natural gas prices. In the Investing for Beginners course, you can learn more about how traders speculate on energy through exchange-traded funds (ETFs).
An investor may choose to use a futures strip to lock in the price of natural gas for a year rather than rolling over their trade and repurchasing another futures contract every time a shorter-term futures contract expires. Depending on the market, rolling over the trade can generate higher trading costs and even negative cash flows if the next futures contract is more expensive than the one that is expiring (contango).
Futures strips are frequently traded in the energy market and there are even options on strips. Traders use them to hedge and speculate on future price movements in oil, natural gas, or other commodity markets. A futures strip is sometimes called a "calendar" strip and can be held long if an investor is hedging against (or speculating on) rising prices in the underlying market, or held short if the investor is hedging against (or speculating on) falling prices in the underlying market.