Crude calender spreads ??

J

J-Law

I read that there is a pattern (Schap's spread book)in the crude curve that the front month calender spread as it approaches expiration will sell off or come in.
So, essentially if you short the front and buy the deferred, roughly 20 days out, the spread going into the front month expiration will collapse or as schap says widen.

This is supposedly due to crude spreads being in a mostly inverted state due to a constant demand/constant supply mktplace. As opposed to a seasonal demand that exists in the distillate products.

I have my own ideas about this, but in an effort to better grasp the under currents that swirl around in the physicals & the associated futures deliveries, I throw this one out there ....

1) Has anyone ever heard of such a dynamic ?

2) Would such a dynamic still occur in such a strong bull crude market as we are experiencing now ? After all it is essentially a bear spread and that could prove painful in the current mkt conditions.



Bueller Beuller.....Anyone...Anyone ????
 
check out mrci.com when you get the chance ... they put out some nice historical spread data. i think you can get a free 2-week trial. what you'll see, many times, are spreads behaving in an orderly fashion for the bulk front-month contract's life, and then tail off in the final 15 - 20 days. so maybe what you're hearing has some merit. it'd be an interesting study as to the viability of the approach in the context of whether the market is contango or backward.
 
I would love to hear if anyone is trading spreads against options. I think you could end up with lot of cheap gamma on an up move, that is losing on the spread but having a call increase rapidly in value. Hopefully on a down move the spread could be scalped enough to break even. Alas I have never traded crude and my IB account doesn't allow for crude options. I can't help but think that there are a bunch of guys in the pit trading this way
 
NJ.

Not an options play. A calender spread in the future short the front month contract vs long the next month out.
 
Quote from zf trader:

I would love to hear if anyone is trading spreads against options. I think you could end up with lot of cheap gamma on an up move, that is losing on the spread but having a call increase rapidly in value. Hopefully on a down move the spread could be scalped enough to break even. Alas I have never traded crude and my IB account doesn't allow for crude options. I can't help but think that there are a bunch of guys in the pit trading this way
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Hey, sorry, I was referring to zf trader's comment. Regarding your comment, can you expand on what you mean by the crude being constantly inverted?
 
Well if the near month is trading at a premium it suggest that demand is high and it is not worth storing the commodity. This should be bullish.

So to take advantage of this you could buy out of the calls on the near month contract and the sell the near month contract and buy the next month out.

The idea is that if you lose on the spread then it is very bullish over and the calls should end up in the money.

If you win on the spread hopefully you can trade it enough to cover your call premuim.

I have no idea what the ratio of spreads to call should be or anything like that. I was hoping someone else had done something like this
 
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