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Most quantitative investment strategies focus on the changing prices of a commodity or equity over time. Derivatives, however, make this more complicated. How can I apply quantitative strategies to something that is not a single product with a single price, but rather separate products for each month (each with their own price and volatility)?

For example, how should I know whether I should be buying an orange futures contract for July 2011 rather than July 2012? Additionally, how could I apply formulas such as a moving average to all of these different prices?

Thank you for bearing with me to answer such a fundamental question, I feel like most quantitative strategies I have read about are in an equity context.

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How do know whether to buy AAPL today or next year? I would argue the other side, that investing/hedging with options is less difficult because you're able to more precisely select the risk you bear. A big eye-opener for me was Coval and Shumway's expected option return paper. And, of course, Hull's book is required reading. –  Richard Herron Apr 28 '11 at 3:43
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Can't believe questions like this are still around while interesting (though controversial) ones such as quant.stackexchange.com/questions/10093/… were closed. This SE has serious moderation issues. –  madilyn Feb 2 at 2:49
    
"How should I know whether I should be buying an orange futures contract for July 2011 rather than July 2012?" --> too broad, opinion-based and basically asking for assistance with developing a trading strategy. –  madilyn Feb 2 at 2:54
    
"How can I apply quantitative strategies to something that is not a single product with a single price, but rather separate products for each month (each with their own price and volatility)?" --> again, basically asking for assistance with developing a trading strategy. –  madilyn Feb 2 at 2:55
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2 Answers 2

Best approach is to model each contract separately, or to develop an equilibrium model that constrains the relationship among the various spot and futures contracts. So if you estimate you can make inferences about the other contracts.

The term structure of interest rates or covered interest parity would be examples of the latter.

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The time behavior of derivatives do not resemble that of commodity or equity towards the end of their life time. Before the expiry date of a derivative there are correlaion models that can be used in both areas, but for your question in making choices between options...

I have practical experience with stocks and sports betting, but not derivatives. Regardless, it looks like sports betting approaches are similar in making choices. Moving average does not really help in making choices, and in general all sort of Markovian online learning models. Traditional derivatives tools like the Greeks, Black-Scholes and other methods look at the history of the data and come out with measures for the futures which is better in your case. Then you can compare values and chose accordingly.

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