Fading Calendar Spreads

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Here2learn

A lot of calendar spreads, energy futures especially because of less seasonality than some commodities such as grains, seem to trade in a range for some time(ie CL Sept-Dec traded +/- ~$1.00 for the last year).

A potential trade could be to fade the current trend in this example as it is at, or outside, the historical range. Though this looks smart from a technical point of view, fundamental factors are more influential on the forward curve now that the contracts are moving toward delivery.

Is it unwise to fade a trend like this in the last month or two before expiration without a fundamental reason to beieve that the spread will narrow?

Of course, some would say to never trade on a technical without also having fundamental backing.
 

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I think that you should validate your perspective a bit further before declaring mean reversion the best strategy.

Trading for mean reversion in commodities spreads the past several years has not been productive. And that is being very diplomatic about it. If you are fading one or two sigma moves you are asking for unsolicited prison sex.

This particular spread does seem at first blush, in a limited timeframe, very mean reverting. When looked at in a broader context, you can see that it trends particularly well and that once the spread breaks out of a trading range and establishes a new value area ( control area in Market Profile parlance ) it is usually there to stay.

The problem with fading is that the money your make fading one and two sigma moves over a period of time is given back when the trade breaks out once again. You will almost certainly have loaded up for size as that spread goes through what you think at that point in time are abnormal 1, 2, 3, and 4 sigma moves.


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I traded CL Q/Z spread for some time and made some money. I bought the spread when it is about -180 and sold at -160. To me monthly carry charge of about 45 cents seemed a fair value. however do not run the spread near delivery of front month because if there is any idea that storage space may not be enough to store front month(congestion), spread may easily come off and put you in deep red. you can also combine this with mrci seasonals and choose spreads whose front month is seasonally strong against back month
this is of course valid for contango situation
 
Quote from TheBlackHand:

Are you subscribed to MRCI.com? They publish tons of seasonal data which should help with fundamental evaluation.
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Great advice... I looked them up and subscribed. Some good info there.

And thanks for the insights, bone.
 
Quote from Here2learn:

And thanks for the insights, bone.
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I will continue to post as provocative and insightful information as I dare - up to the point where I have paying clients complaining about Intellectual Property they paid for. I also bought an MCRI subscription for several months in the early 2000's - and soon outgrew it to the point where I went on to other tools. The best commonly available tool for this type of work is the Bloomberg Terminal. Please note that I said 'commonly available'; and not necessarily 'affordable'.

I suppose if 10 million people wanted the Porsche 911 GT3, that Zuffhausen would find a way to build a few more of them.
 
Quote from TheBlackHand:

Anyone use www.scarrtrading.com ? They seem to have some useful info for seasonal spreads.
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Yep, for the third year. Good, cheap way to analyze daily datas on curves, seasonals, COT...

Dan Scarr once fixed bugs in 2 hours on a sunday afternoon when I asked him...
 
I'm looking for a screener that provides a list of spreads that meet a particular criteria that I would enter into the search box. Any suggestions?

thanks,

Walt
 
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