Spread trading strategies in the crude oil futures market. The equity markets are currently in a period of low implied volatility (IV), but Crude Oil Futures are still in play. Are there any interesting strategies in /CL? Mike Hart, aka Beef, from our research team, had some ideas about using Futures Calendar Spreads, and the first place to start was with the Futures.

Spread trading strategies in the crude oil futures market

Basic Concepts of Spread Trading

Spread trading strategies in the crude oil futures market. These differences are reflected in the price spread between both futures contracts. The spread is mean reverting because most of the price shocks are only temporal so the spread moves back to its long term economical equilibrium and therefore it is possible to create a trading strategy based on this mean reversion.

Spread trading strategies in the crude oil futures market


The equity markets are currently in a period of low implied volatility IV , but Crude Oil Futures are still in play. Mike Hart, aka Beef, from our research team, had some ideas about using Futures Calendar Spreads, and the first place to start was with the Futures curve. The futures curve for any commodity shows how the market is pricing it in the future. When trading any commodity make sure you understand the curve.

Crude Oil is currently in contango because storage space is limited, leading to more expensive Crude Oil futures prices. Understanding such factors can be applied to other commodity curves and the Treasury curve. One strategy we can use is that of a Futures Butterfly, a spread using 3 different Futures contracts with 3 different expirations. These Butterflies are not like equity option Butterflies , which are constructed with 3 different strikes in the same expiration.

A Futures Butterfly is constructed using three different months. Mike laid out his trade and the reasoning behind it. It was a Crude Oil Futures Butterfly that was constructed by buying one December contract, selling two December contracts and buying one December contract. The most efficient way to establish the position would be via a Dec16 - Dec17 spread and a Dec17 - Dec18 spread.

An advantage of this over a straight futures position is that it requires much less margin , and if we are right leads to a higher return on capital ROC. The term structure does add complexity and there is some legging risk but those disadvantages are smaller. What Else Ya Got? Market Measures on February 5th, Please enable JavaScript to view the comments powered by Disqus. To reset your password, please enter the same email address you use to log in to tastytrade in the field below. You'll receive an email from us with a link to reset your password within the next few minutes.

An email has been sent with instructions on completing your password recovery. Register today to unlock exclusive access to our groundbreaking research and to receive our daily market insight emails. Beginning of Segment Discussion Trading a Futures Butterfly Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

For more on Crude Oil Spreads see: Splash Into Futures with Pete Mulmat.


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