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My latest trade opened yesterday began pretty poorly, trading around $0.30 lower before finally turning on its head midday today. I took the trade initially as I had seen CL was up 3% yday but CO only 1.5% and CO is usually the stronger performer. The odd finding is, ever since going in my favour, my other trade (CLV5/CLZ5) has turned and erased some of the earlier gains. This afternoon alone the spread has widened almost $0.20 erasing around $250 worth of P&L today. My two dilemmas are:
I'm not sure if this is simply just coincidence or if there could be some correlation between Brent's performance > WTI and the CL Oct v Dec spread. If there is a correlation, is this some form of spread hedge? If it is coincidence do I let it play out and hope it corrects in my favour? Do I treat them independently?
Secondly, Initially I had a firm idea of where my SL would be and the risk I was willing to take. I'm unsure of how to manage them once onside though. Seeing as spreads move much more slowly in general, I'm inclined to leave them both on and play out, however, it would seems stupid to let the trade go all the way back to B/E or to my SL.
Anyone care to throw some thoughts/suggestions in?
Can you help answer these questions from other members on NexusFi?
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals, U308 and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,059 since Dec 2013
Thanks Given: 4,410
Thanks Received: 10,226
Well firstly, I would mention that you now have prompt month crude positions in fact there is only 13 trading days left for the Brent postion.
I'll quote an old post of mine below. This data is now 6+ months old but standard deviation of the move in the front month spread is/was 18.8c vs 8.9c in the second spread ... ie double! I'm sure analysis of Brent/WTI would be similair. ie Your now taking a lot more risk than you were.
Re: Brent-WTI as I've mentioned before Brent is now the World Benchmark (no matter what the CME marketing literature tells you) and WTI represents a land locked crude that at times doesn't have a home. Mid-American crudes now flow south to the Gulf Coast, which prices relative to Brent, but that pipeline capacity is limited. In theory at least, the Brent-WTI spread will widen when world crude fundamentals become tighter (upward pressure on Brent) or when WTi/mid-American fundamentals weaken (downward pressure on WTI).
I'm not currently tradiing Brent (been threatening to restart now for about 6 months) but a good friend who trades a lot of Brent-WTI (professional not retail) is generally bullish that spread - ie looking for it to widen.
If widening meant to be something about -10, I agree on that Wide spread is benefiting US refineries (read exports). Then inputs may stay higher for longer time, exports are still strong.
excellent info as always, thanks! I'll be sure to start testing all these findings and see how different maturities act along the curve - especially toward expirations. (On a side note - I also amended my excel sheet that had CLZ5 incorrectly written where it should have also read COV5 from where I copied the sheet into a new tab).
I believe he means that the Brent premium will increase and thus the spread widen due to the locational detriments of WTI. Is this your view too?
@MktOutperform: Crude: 9 trading days away from this being the longest period in history below its 200-day moving average. $CL_F pic.twitter.com/ntVQV2EehY
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals, U308 and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,059 since Dec 2013
Thanks Given: 4,410
Thanks Received: 10,226
WTI used to be premium Brent so there's still a contingent of the market who quote it WTI-Brent even though WTI is now negative, so yes I believe we are saying the same thing.
Sure Mike. Well, I have found that CL follows the hedgers closely compared to other commodities and they are in an relative extreme net long position this week. So next week they would go net short meaning they are long the cash commodity expecting to sell the product they hold at a higher price.
I am buying USO instead of QM or CL because I don't have enough money in my account.
There was also a bullish candle with significant volume that I interpret as buying pressure yesterday. That is triggering my entry signal.