Tom-Next Carry Trades
For a lot of commodity traders, managing spread risk is a question of rolling positions month-over-month, a relatively straightforward process.
But on the LME, there's a whole world of opportunity (and risk) in the daily prompt date structure. Traders who understand how to manage these nearby positions through tom-next and cash-for-a-day spreads can potentially unlock greater value than traditional month-over-month carries allow.
These aren’t simple strategies but they are powerful tools if you have the systems and expertise in place.
In this article we explore:
🔹 How LME prompt structures create risk (and reward)
🔹 What “full finance” really means
🔹 Why contango isn’t always capped where you think it is
🔹 And who is actually trading tom-next and why
The Starting Point: Carry Trades in Physical Metals
When most people in the metals industry think about carry trades, they’re usually looking at month-over-month exposures.
This is typically because physical traders buy metal before they sell it. To hedge the purchase, they go short futures. If their physical sale is delayed, or planned well into the future they must extend (or "carry") their short hedge position forward in time.
What Makes the LME Unique
The London Metal Exchange offers something not available on most other exchanges: a daily prompt date structure on a rolling 3-month basis. You can place a trade for delivery on any business day within that window.
For example, a trade executed today on the LME’s cash settlement price (CSP) will have a prompt date two business days from today. Let’s say you hedge a physical purchase today, your short futures would be prompt 22nd May. If you don't roll that position forward, you would be obligated to deliver LME warrants into an exchange warehouse.
Many traders default to rolling that position to the next available 3rd Wednesday (the most liquid monthly prompt date), but those with the expertise and systems in place can pursue an alternative: keeping the execution nearby.
The World of Tom-Next and Cash-for-a-Day
The LME supports active trading of ultra-short-dated spreads:
Tom-Next: Moving a position from tomorrow’s prompt date to the next business day
Cash-for-a-Day: Moving a position from 2 business days' time to the following business day
These trades are executed daily, and all tom positions must be cleared before 12:30pm London time (start of the second Ring session).
Why keep positions nearby? Because there may be more profit available in the daily rolls than the monthlies.
Why Month-Over-Month Spreads Are Capped
Month-over-month contangos are effectively capped at full finance: LME warehouse rent + Financing cost for 1 month
Why? If contangos exceed that level, you could:
Establish a long position by borrowing the spread
Allow your long to go prompt and take delivery
Hold physical metal
Deliver back on your short prompt
If the spread you achieved on your borrow was higher than the cost of financing and warehousing, you'd earn a risk-free profit. Because of this, as contangos widen and approach full finance levels, more and more borrowers enter the market, capping the spread. This is especially true for metal stored off-exchange at lower rent, which becomes profitable even sooner than LME warrants.
The Risk and Reward of Staying Nearby
Let’s say the month-over-month contango is $8/mt contango, but tom-next is trading $0.75/mt per day. If you’re able to maintain that level across 20 trading days, you’ve earned nearly 2x the month-over-month spread.
Assumes 20 trading days and stable contango throughout. Actual performance will vary based on market conditions
However, trading nearby spreads is not without risk:
Backwardations can spike, sometimes suddenly and even with limits on tom-next backwardations of 0.5% of the prior day's cash price, these can quickly wipe out any profits
Shorts that are not rolled become physical delivery obligations
That’s why larger traders, banks, and brokers with strong operations technical knowledge are typically the ones who pursue tom-next trades actively.
You don't need to have a physical position to trade these near-dated spreads, some companies trade them purely speculatively, with no underlying physical exposure. Tom-next trading is also executed from the long side - lending long positions one day at a time to extract additional profits in periods of backwardation.
Final Thoughts
The LME’s daily prompt structure allows for more dynamic risk and reward management than traditional month-over-month strategies. Understanding how to operate in this space requires deep knowledge of prompt date structures, the underlying market behaviors, and operational discipline. But for those positioned to execute correctly, the payoff can be substantial.
Interested in optimizing your carry strategies?
Perfectly Hedged helps companies understand these advanced hedging structures like tom-next. If you're looking to gain a competitive edge, let’s talk.
