Backwardation Effects: Asset Strategy and Trade Timing Debunked
Is backwardation unusual? It just sounds like an expected decrease in value. Why not just sell the asset when backwardation is occurring, rather than holding onto it?
Backwardation is not unusual, as it can occur in certain market conditions, particularly in the commodity markets. It often arises as a result of supply and demand imbalances, such as when there is an immediate shortage of a commodity, driving up the current spot price compared to future contract prices.
Investors can take advantage of backwardation by selling the asset and considering purchasing it later at a lower price, as you mentioned. However, it's important to keep in mind that market predictions are not guaranteed, and the anticipated price decrease may not happen as expected. Market conditions, global events, or other supply and demand factors may cause fluctuations in the asset's price over time, making it challenging to predict the future price accurately.
So, while it might seem like an obvious strategy to sell now and buy later at a lower price during backwardation, there are risks involved, as the expected decrease may not materialize. It's essential to make informed and well-researched decisions based on your risk tolerance and investment objectives.