The arbitrage between different months of the same commodity is called cross-month arbitrage; Arbitrage between different commodities is called cross-commodity arbitrage. Investors make a profit by obtaining the difference between two contracts. The arbitrator is concerned about the price relationship between the two contracts, not the absolute price of the goods.
Large commercial organizations do a lot of arbitrage transactions. They analyze and use the basis difference between commodity buyers and adopt various ways to carry out arbitrage transactions. Large speculative institutions (funds) also carry out arbitrage. However, small speculators, mainly individual investors, rarely set foot in arbitrage trading. This is because it is very complicated to track and analyze some basic differences. But there are some simple arbitrage trading skills that are suitable for individual investors to learn and use.
It is said that most arbitrage traders mainly rely on fundamental analysis to make their own trading decisions, while most speculators who directly trade futures mainly rely on technical analysis to make trading decisions.
As I said at the beginning, arbitrage trading is less risky than direct futures trading. Storeable goods have their extra costs, and for senior arbitrage traders, the basis rarely exceeds a certain historical level. In other words, a trader can determine the degree of risk in his mind when carrying out arbitrage trading. Some arbitrages fluctuate violently in the course of trading, such as cross-commodity arbitrage. Because of the low risk, brokers require less margin for arbitrage traders than investors who directly trade futures.
Cross-month arbitrage is divided into "bull market basis" and "bear market basis". Bull market basis arbitrage refers to traders buying near-month contracts of the same commodity and shorting forward contracts. The trader does this arbitrage because he thinks that the recent month is stronger than the forward contract (the price rises faster). On the contrary, if the price falls, people think that the recent contract has a smaller decline than the forward contract. Moreover, there are always short-term contracts eager to rise, while long-term contracts are always waiting for the possibility of falling. Bear market basis is just the opposite of bull market basis. For the same commodity, investors short the recent contract and make multiple forward contracts. Bear market arbitrageurs believe that forward contracts will have more room to rise than recent contracts, or that recent contracts will fall faster than forward contracts. In the market, we can use the bull spread or bear market arbitrage as a substitute for direct trading. Its advantages are small vibration and low marginal cost. The disadvantage is that when you judge the market trend accurately, the profit obtained by basis arbitrage is not as large as the space for simply making contracts.
A special way of cross-commodity arbitrage is between a commodity and its affiliated products. A common arbitrage method is between soybean and its products, bean cake and soybean oil, which is called "soybean oil arbitrage". This arbitrage is a relatively complicated transaction. Soybeans are rarely eaten directly. Almost all soybeans are produced into two products: bean cake and soybean oil. Soybean producers benefit from the cost of purchasing soybeans and the price difference of bean products. This kind of transaction is called "soybean oil arbitrage".
For those investors who simply engage in futures trading, commodity basis arbitrage is a valuable investment tool. For example, if the price of corn has risen strongly in recent months, it often means that the market has been in short supply. This is a signal that the fundamentals are bullish and the price may rise further. On the contrary, if the increase of corn in recent months is not a forward contract, investors can generally draw the conclusion that the recent price increase is mainly driven by technical buying, but the fundamentals are still not substantial, so be prepared to short at any time.
By observing the basis, investors can find out which contract has the strongest trend, thus buying the contract and throwing out those contracts that may be weak.