CL spread questions

L

LCFXTRADER

I am short 1 CL.M14 @ 102.85
I am long 1 CL.N14 @ 101.98

Will the prices half to converge at some point before CL.M14 expires? Is it possible that it will maintain the spread even up to expiration day?
 
They don't have to converge and it is possible for the spread to be large still at expiration. Spot and the front month do converge at expiration or there is an arbitrage opportunity.
 
FCXoptions said:
Spot and the front month do converge at expiration or there is an arbitrage opportunity.
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Well, for The Nymex CL contract the physical delivery "challenges" and supply considerations do not always make this true. Positive basis = Backwardation
 
LCFXTRADER said:
Bone,

Can you please share your input regarding the 1st post?

Thanks,
lxfxtrader
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Generally speaking, I steer my clients away from simple calendar pairs in the energy complex that are so close duration-wise to the prompt months - because essentially you are taking on delta directionality with the underlying.

So, in other words, you are essentially speculating on flat outright price. You have on an outright mini-CL for all practical intent and purpose. That duration combination is completely influenced by spec order flows and demand-side needs by commercials. Has very little to do with demand versus supply divergence or convergence.

You asked, and that is my honest forthright opinion.


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bone said:
Well, for The Nymex CL contract the physical delivery "challenges" and supply considerations do not always make this true. Positive basis = Backwardation
More...

I figured someone would come in with a better answer lol.
 
FCXoptions said:
I figured someone would come in with a better answer lol.
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Well, earlier you stated "Spot and the front month do converge at expiration or there is an arbitrage opportunity."

That's all well and good unless you happen to check on the availability and pricing of pipeline and storage rack space into Cushing, Oklahoma. There is no arbitrage if for all practical intent and purpose you cannot deliver the physical. These are not cash-settled contracts and the fungibility requirements are very specific. Look at the Platt's terminal pricing differentials.
 
So what happens to both of the prices of the front month and near month from post 1 the day of expiration for the front month? Could it expire with a 50, 70, 90 point delta? :confused:
 
Update: CL.M14 @ 101.55
CL.N14 @ 101.00

The spread has converged by 32 points since the position was open. Can anyone please answer the question above?
 
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