Comfortably broke -1.00 and seems to want to head towards -0.80. Any ideas why? Since the front month contract is expiring, would this add to its behaviour?
usually commercials rolling their short strip positions forward - they scale, and when they're done the spread will sell off again
RE crude spreads,I have made a living trading commodity spreads. The most important relationship is the stocks in a deliverable position vs. the size of the open interest of the nearby. If physical stocks are sufficient to cover the nearby month there is less chance of a participant standing for delivery and squeezing the market. The market will then be less willing to pay a premium for the nearby relative to the deffered and the spread will gravitate towards full carry. The composition of the open interest is also important and plays a role. Where the long in the nearby is a spec position, index funds for example, the market is less concerned about a potential squeeze as specs do not typically take delivery. Again, the spread should gravitate towards full carry. The specifications of the contracts also influence spreads. Where there are position limits for the delivery months, this may be a disincentive to take deivery if the limits are sufficiently small. This example favors the short and can be a perpetual characteristic of the contract. I have used this stategy to trade against funds for a number of years. Personally, I would not use technicals to trade spreads. Hope this has been of some help.
Nice post, thanks for your insight local... I've been trading these for about a year now with enough success to keep me around, but I have a ways to go. Bear spreads had stopped working there for a few weeks in the 2010 strip, but after watching today, maybe that party isn't over? Currently short Q/Z at -2.75, mental stop at -2.55...
Another strategy fro trading crude spreads in a bear market is the butterfly spread. It has consistently worked over the past 18 months. Sell the nearby spread (aug-sept) and buy the deferred(sept-v). If stocks continue to be burdensome it will expressed in the nearby to a greater extent than the deferred. You may end up losing money in the deferred but will more than make it up in the nearby. It will allow you to sleep at night while having the potenital to make $1 or even a few dollars. It also allows you to trade some volume. local.
Interesting, that does seem to match up with what we've watched seen this spring. When you overlap the sep though, aren't you just short the Aug/Oct then? What would be the drawback to a short Q/U, long V/X ? Thanks
Your position will be short Q long 2U shortv What you are really trading is the difference between the Q/U spread and the U/V spread. Currently the Q/U is traing about 77 and the U/V is about 68. This strategy works when the Q/U fals apart while the U/V also loses money but not nearly as much. e.g. the june/july went to $5 while the N/Q didn't come close to that. On days like today when spreads narrow (Qis done, less interest in spreads for a couple of weeks) you can take off the U/V for some kind of a profit. This strategy allows you to "hit the home run" so to speak, while being able to quantify your losses to some extent. It worked very well in 09 winter when the nearbys went to $8. I don't think we will see too many more ofthose $8 nearbys, Too much of a disincentive for the longs to maintain positions.
Yea I misread that, thanks. I like the idea but need to learn more about its appropriate applications, alot of which has to do with your earlier post I think regarding deliverable stocks vs open interest in the nearby...
Thanks for you reply local - i found your information to be incredibly insightful. Just have a couple more questions. Where do we find information on open interest? Also, is there any resource which shows what the net longs/shorts? I'm just curious because it seems the spread is continuing to narrow. I'm guessing its because either funds are stacking longs on the basis of emerging market recovery, or noone is buying future contracts becuase the price is already too high. Is this sound logic? Or am i completely missing the point with CL spreads. Any feedback would be appreciated.
Yea so much for bearspreading for a while...Open interest can be found on the CME group website, or most trading platforms. You can get Commitment of trader data from the cftc, and they chart it at tfccharts.com.