Bull and Bear Arbitrage

Buying the near month and selling the far month is bull market arbitrage.

Selling the near month and buying the far month is bear market arbitrage.

It can be understood as follows:

In a bull market, the market is in short supply and demand, and it is expected that the performance of the near-month contract will be stronger than that of the far-month contract, so buy the near-month contract and sell the far-month contract.

In a bear market, the market is oversupplied, and the performance of near-month contracts is expected to weaken, while far-month contracts are likely to strengthen, so sell near-month contracts and buy far-month contracts.

Bull market arbitrage and bear market arbitrage are based on the buying and selling behaviors of the near month and the far month, or in other words, they are used to make profits by taking advantage of the changes in the relevant price relationships between different months.

The spread is defined as the price of the higher priced contract minus the price of the lower priced contract.

Moreover, if the price difference is defined as the higher-priced contract A minus the lower-priced contract B when opening a position, then A minus B should also be used when closing the position.

Currently, buy A and sell B at prices a and b respectively, which constitutes the current price difference a-b>0. The future prices are a1 and b1, and the future price difference is a1-b1

The profit is (a1-a) + (b-b1). The reason for this is that one buys in the hope that the price will increase, and sells in the hope that the price will decrease.

(a1-a) + (b-b1) = (a1-b1) - (a-b) = Future spread - Current spread

Therefore, the profit from buying A and selling B depends on the widening of the spread. In other words, it is the buy/long spread.

Symmetrically, buy B and sell A. The initial spread is still a-b>0. The future spread is a1-b1.

The profit is (b1-b)+(a-a1). The reason for this is that one buys in the hope that the price will increase, and sells in the hope that the price will decrease.

(b1-b)+(a-a1) = (a-b) - (a1-b1) = Current spread - Future spread

When the spread narrows, you will make a profit. That is, you are selling/shorting the spread.