Crude Oil Spreads: A Quick Intro.
Spreads are complex instruments. This is just an introduction and some ideas to get our brains ticking over. I had started writing a guide to understanding these three types of spreads, but it just got a little long. It might be easier to do it this way:
What do you see above?
Here are some observations to get started:
1
All spreads topped out well before June Crude Oil topped out. From about 17th Feb, those spreads stopped gaining. Could spreads be a way to take a contrary position as a trend exhausts itself, and have a little room for error? It certainly is here (although not always the case).
2
Look at the ATR for each. Spreads show lower volatility.
3
Correlations (the CC shows the spread correlation to the underlying June contract). Correlations seem strong during a trend then do their own thing at other times. Change creates opportunity. Constant correlations are not as fun.
4
Basic spreads: bull and bears – are directional. That is, they move closely with the underlying. More complex spreads, like the fly and condor seem to be suited to shifting sentiment along the forward curve.
5
Flies and condors are very similar. The condor tends to have a little more volatility than the fly. In this case, it’s not much.
-
It can be a complex subject, worthy of something closer to a book, than a comment here, but it’s a start.
Just a warning – going down the spread trading path might change everything.
-
A couple of futures markets where flies and condors are often traded: Crude, Natural Gas, Grains, Eurodollars (and most other STIRs). Options - that's a totally different chat....
What do you see above?
Here are some observations to get started:
1
All spreads topped out well before June Crude Oil topped out. From about 17th Feb, those spreads stopped gaining. Could spreads be a way to take a contrary position as a trend exhausts itself, and have a little room for error? It certainly is here (although not always the case).
2
Look at the ATR for each. Spreads show lower volatility.
3
Correlations (the CC shows the spread correlation to the underlying June contract). Correlations seem strong during a trend then do their own thing at other times. Change creates opportunity. Constant correlations are not as fun.
4
Basic spreads: bull and bears – are directional. That is, they move closely with the underlying. More complex spreads, like the fly and condor seem to be suited to shifting sentiment along the forward curve.
5
Flies and condors are very similar. The condor tends to have a little more volatility than the fly. In this case, it’s not much.
-
It can be a complex subject, worthy of something closer to a book, than a comment here, but it’s a start.
Just a warning – going down the spread trading path might change everything.
-
A couple of futures markets where flies and condors are often traded: Crude, Natural Gas, Grains, Eurodollars (and most other STIRs). Options - that's a totally different chat....
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