  This paper studies the problem of trading futures with transaction costs when
the underlying spot price is mean-reverting. Specifically, we model the spot
dynamics by the Ornstein-Uhlenbeck (OU), Cox-Ingersoll-Ross (CIR), or
exponential Ornstein-Uhlenbeck (XOU) model. The futures term structure is
derived and its connection to futures price dynamics is examined. For each
futures contract, we describe the evolution of the roll yield, and compute
explicitly the expected roll yield. For the futures trading problem, we
incorporate the investor's timing option to enter or exit the market, as well
as a chooser option to long or short a futures upon entry. This leads us to
formulate and solve the corresponding optimal double stopping problems to
determine the optimal trading strategies. Numerical results are presented to
illustrate the optimal entry and exit boundaries under different models. We
find that the option to choose between a long or short position induces the
investor to delay market entry, as compared to the case where the investor
pre-commits to go either long or short.
