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Calendarspread

IO Weekly Technicals Review [2024/43]: Term Structure Divergence SGX TSI Iron Ore CFR China (62% Fe Fines) Index Futures (“SGX IO Futures”) closed nearly flat last week, down by just USD 0.10/ton on Friday after recovering from a mid-week decline. SGX IO Futures opened at USD 101.65/ton on 21/Oct (Mon) and closed at USD 101.55/ton on 25/Oct (Fri). Prices briefly touched a weekly high of USD 103.45/ton on 21/Oct (Mon) and a low of USD 98.10/ton on 24/Oct (Thu). It traded in a range of USD 5.35/ton during the week, which was smaller than the prior week. Prices traded below the pivot point of USD 103.35/ton for the entire week but managed to hold support above the S1 pivot point at 97.65. Volume peaked on 25/Oct (Fri) as Iron Ore prices rallied from near their low following the announcement of a parliamentary meeting to discuss the stimulus package between 4/Nov and 8/Nov. SGX Iron Ore Futures Fundamentals in Summary Iron Ore received support in the later part of the week from the announcement of a parliamentary meeting to discuss the stimulus package in China which will take place between 4/Nov and 8/Nov. The People's Bank of China also said in a statement it had activated the open market outright reverse repo operations facility to "maintain a reasonable abundance of liquidity in the banking system and further enrich the central bank's policy toolbox“ ahead of a significant loan expiry at the end of the year. IO China Portside inventories declined by 400k tons to 149.33 million tons last week. The decline was driven by slower arrivals as pickup volume declined week on week and steel mill’s restocking pace was below analyst expectations. Based on seasonality, SGX IO Futures Nov contract trades 2.6% below its last 5-year average (USD 105.58/ton). Seasonal Trend also suggests a price low is expected in the next few weeks. Short-Term Moving Averages Signal Reversal of Bullish Trend Prices began the week on a downward trend, marked by a bearish moving average (MA) crossover on 22/Oct (Tue). After the crossover, prices declined 3%, briefly dipping just above the S1 Pivot Point before recovering sharply on 25/Oct (Fri). On 28/Oct (Mon), prices are trading slightly below the 21-day moving average and the R1 Pivot Point for the week. Long-Term Averages Signal Bearish Trend Last week, the price traded below the 100-day moving average, closing just under this level. On 28/Oct (Mon), it rose sharply above the 100-day moving average but remains about 5% below the 200-day moving average. MACD Points to Fading Decline, RSI Trending Higher MACD indicates that the bearish trend is weakening, with the short-term MA beginning to curve upward toward the long-term MA. This suggests a potential consolidation around the long-term MA or a bullish crossover if momentum strengthens. Meanwhile, the RSI recently crossed above its 14-day average but remains near the midpoint at 53.84. Fibonacci 61.8% Maintained Support Last Week Volatility increased throughout the week but remains below early October levels. Last week, the price tested and held support at the 61.8% Fibonacci level from the prior uptrend. Fib levels from the recent downtrend suggest that the price may next retest the 38.2% level. The 61.8% level remains noteworthy, as it has previously acted as a key area of interest. Low-Volume Node May Drive Sharp Upward Move Despite ongoing selling pressure, buyers rebounded sharply in the latter part of the week. The price is currently at a low-volume node and could rise quickly toward the point of control, which aligns with the 50% Fibonacci level. Calendar Spread Shows Deviation from Backwardation The recent price movement has created a premium on the April 2025 contract compared to the second-month contract (Nov 2024). A return to the usual backwardation structure is expected. Additionally, speculation over the next two weeks, driven by the upcoming parliamentary meeting, will likely focus on the more liquid Nov 2024 contract, which should further support the spread. Hypothetical Trade Setup Iron Ore prices received some support from the announcement of further monetary easing and hopes of further stimulus at the parliamentary meeting next week. The rally has reversed the consistent decline in IO over the past 3 weeks but outlook remains bearish as the impact of stimulus on prices has weakened since early October. In the near-term, stimulus expectations may drive a rally clouding the outlook for a straightforward short position. We propose a hypothetical trade set up of buying SGX IO November Futures Contract at USD 102.90/ton and selling the SGX IO April 2025 Futures contract at USD 103.60/ton to capitalize on the normalization of the backwardated term structure. Presently the Nov/April ratio is at 0.99324. An increase to 1.025 presents a 3.25% increase in the spread which results in a gain of USD 321 to USD 330. A stop loss at the ratio of 0.975 protects in case of further decline with a potential loss of USD 189 to USD 194. This calculation excludes transaction costs comprising of clearing broker fees and exchange clearing fees. The SGX requires a minimum initial margin of USD 320/lot and a maintenance margin of USD 352/lot for this intra-commodity spread. DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
SGX:FEFX2024Long
by MintBulkCommods
$GLD Breakout and Option Strategy Spotlight with Overlay It looks like GLD 0.44%↑ finally broke out of its sideways-upward channel on Friday. Time to explore some opportunities using our Options Overlay indicator on TradingView. The current IVR is at 84, while the 62 DTE average IVx is only 19.9, making this IVx level exceptionally high for gold over the past year. On the daily chart, the Gold ETF is trading between the 6/8 and 7/8 levels. The options chain shows that calls 62 DTE are about 130% more expensive, indicating a strong bullish sentiment in the market. Examining the standard expected move (STD1), even at 4 DTE, the upside target is 237 (7/8), with the downside at 6/8. The delta curve shows the 16 delta OTM call trending upwards toward the 8/8 level, which aligns with the 250 level. Given this, I would caution against buying single-leg calls at such inflated prices. A pullback could dramatically reduce their value, and time decay will work against you. If you're determined to go bullish, a simple CALL butterfly offers a better risk-reward ratio! GLD Bullish strategy - if we are expecting rising IV Assuming further IV increases (IVx rose by 2% over the last 5 days despite a drop in VIX and a rise in the underlying), a CALL calendar spread presents a solid R:R setup. The Options Overlay quickly highlights the optimal expiry dates to target: Sep 20-27. I noticed a 4% volatility skew between these dates. The standard expected move (STD1) and delta16 suggest an upward probability range capped at 245, meaning there's an 86% chance that AMEX:GLD stays below this level by Sep 20. Here's my setup in this case: GLD Sep 20th - Sep 27th 245 Calendar Call Spread. This spread, spotted in under a minute on TradingView, offers nearly 8x risk-reward, but it's beneficial only if you're betting on continued IV increases.
AMEX:GLDLong
by TanukiTrade
Copper's Short-Term Demand Woes, Long-Term GapsCopper is known as the electrifying metal. Copper's warm glow and durable spirit, copper wires the heart of many a machine. This reddish rarity has been super bullish in the recent past but less so now. That doesn't make it less investable. Just that nuanced investing approach is called for. Outlook for copper has become mixed once more, with near term demand remaining downbeat given the continued slowdown in the Chinese property market and buildup in copper stock at SHFE. In the longer term, supply challenges risk pushing copper into a supply deficit with major copper miners Codelco and Anglo American facing supply challenges. Given the mixed outlook, copper has continued to trade in a tighter price range over the past two months. Counter to conventional wisdom, a sideways market also presents opportunities for savvy investors. This paper describes the diverging outlook for the red metal and how investors can deploy a calendar spread using CME Micro Copper futures amid the diverging short and long-term outlook. CHINESE COPPER INVENTORIES BUILD UP BECAUSE OF DEMAND SLOWDOWN Chinese copper inventories have surged to one of their highest historical levels. Furthermore, inventories have been rising during the part of the year associated with drawdowns. Source – Bloomberg Lower demand is one of the factors behind the increasing inventories. The Chinese real estate sector is a major consumer of copper. With the ongoing slowdown in the sector, copper demand has been hit hard. Moreover, manufacturing sector in China is also experiencing a slowdown as China’s official manufacturing PMI dipped back into contraction in May. Source: TradingEconomics Combination of property market slowdown and lower industrial activity is hindering copper demand in the near term. Furthermore, refined copper production among Chinese copper smelters has remained near all-time high levels over the past few months. Source: Bloomberg BULLISH SUPPLY SIDE AND INDUSTRIAL RECOVERY POSE UPSIDE TO COPPER While near-term demand outlook may be downbeat, the medium- and long-term outlook for copper remain bullish. In the medium term, higher demand from the rapidly growing PV (photovoltaic) manufacturing and EV industry are absorbing some of the higher copper supply. While both industries have slowed in recent months, analysts expect them to recover. At their current pace of copper consumption, these industries are more than compensating for the slowdown in the property market. Source: Reuters Additionally, major copper miners, Codelco and Anglo American are dealing with lower production. Codelco, the world's largest copper producer, reported a 9.4% decline in production in the latest quarter compared to the previous year. This decline is attributed to falling ore grades, water restrictions, union protests, and logistical challenges exacerbated by the global situation, including the pandemic and geopolitical tensions. Anglo American also announced plans to reduce its copper production in 2024 as part of a strategy to cut costs and adapt to market conditions. Lower output from major copper miners is a cause for concern given the rapid pace at which the new energy industries such as EVs and PVs are growing as well as the rapid growth in data centers which require substantial amount of copper. With inadequate supply, copper supplies face the risk of being pushed into a deficit. ASSET MANAGERS HAVE REVERSED VIEW ON COPPER BULLISHNESS While asset managers had built up substantial long positions during the sharp rally in copper which took price to an all-time high, they have started to close some of those long positions indicating that in the near-term price may have run ahead of themselves. Source: CME QuikStrike Over the past week, September CME options have seen a buildup in puts while calls have declined. The November contract has seen a similar trend. However, the March 2025 contract has seen a surge in call OI. Source: CME QuikStrike In a similar vein, CME copper future’s term structure has shifted from a steep contango to backwardation over the last three months. However, over the past week, this has started to shift once more as premium of later contracts over front month has started to rise leading to a steepening term structure. HYPOTHETICAL TRADE SETUP Given the diverging outlook for copper in the near-term and later term, investors can express a view on the shift in term structure using a calendar spread consisting of CME Micro Copper futures. The below hypothetical trade setup consists of a long position in Micro Copper futures expiring in March 2025 (MHGH2025) and a short position in Micro Copper futures expiring in August 2024 (MHGQ2024). Investors can also deploy the same trade setup using CME full-size copper futures. The CME full-size copper futures also provide a margin offset for the trade, a calendar spread with the same contract can be deployed with maintenance margin of USD 2,500 as of 24/June. The below hypothetical trade setup provides a reward to risk ratio of 1.43x. Entry: 1.011 Target: 1.055 Stop Loss: 0.98 Profit at Target: USD 492 Loss at Stop: USD 342 Reward to Risk: 1.43x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
COMEX:HGH2025Long
by mintdotfinance
Corn Prices To Fire Up on Rising Energy CostsIt is official. Inflation is back. But not everywhere. Food inflation is on the decline. All three major crops, Soybean, Wheat, and Corn have declined substantially. Bearish sentiments rings loud across agri with ample supplies combined with solid harvest expectations. Among crops, corn has fared best. Its prices have not declined as much. Corn outlook is positive given South American supply uncertainty and gasoline linked demand spike. Corn prices face downside risk from ample supply in the near term. Prices have the potential to spike during later part of the year due to supply uncertainty and higher consumption. Traders can deploy a calendar spread in CME Corn futures comprising of a short September 2024 Corn Futures (ZSU2024) and a long March 2025 Corn Futures (ZSH2025) to gain from shifting dynamics. RECORD US CROP WILL SUPPRESS NEAR TERM CORN PRICE The US produced a record 389.69 million MT of corn last year as per latest USDA figures. Massive production is a result of record high yield of 177.3 bushels per acre. Globally, corn production in the current marketing year is expected to reach a record 1,227 million MT, due to the US crop last year. Higher supply is expected to lead to a buildup in ending stocks. Stocks are expected to increase from 302.19 million MT to 318.28 million MT. This represents a buildup of almost 16 million MT. Ample supplies are a headwind to near term corn prices. USDA ESTIMATES MAY BE TOO OPTIMISTIC Global corn production forecasts by USDA may be too optimistic. Upcoming harvests from Brazil and Argentina may spring surprises to the downside. USDA’s forecast for the Brazil corn crop is currently at 124 million MT. Brazil’s national agricultural agency - CONAB - puts the harvest at 110.9 million MT as per their latest crop survey . The difference stems from USDA’s assumption of higher planted area. CONAB recently cut its estimate for planted area pointing to lower crop prices dissuading farmers from planting corn. Planting in Brazil is delayed from its usual schedule. USDA is also optimistic about the Argentinian crop. It reduced its forecast for Argentinian corn by 1 million MT to 55 million MT in the latest WASDE report. However, that is still optimistic given the ongoing spread of spiroplasma disease. Last week, Argentina’s Rosario Exchange slashed corn estimates to just 50.5 million MT from a previous forecast of 57 million MT citing crop loss linked with diseases. USDA estimates are 18 million MT higher than harvest forecasted by regional agencies across Brazil & Argentina. Corn supplies may end up being much tighter than the USDA is currently forecasting if harvests come softer than anticipated. ETHANOL PRODUCTION IS LIKELY TO INCREASE CORN CONSUMPTION USDA increased its forecast for corn consumption for ethanol production by twenty-five million bushels (635k MT) in the latest WASDE report. With gasoline and crude prices on a tear, ethanol blending into gasoline is likely to remain elevated during the coming months driving corn demand. Sustainable Aviation Fuel (SAF) serves as another source of corn demand in 2024. The Biden Administration is set to release its primary climate model for SAF subsidies under the Inflation Reduction Act in the “very near future”. While recent reports have stated that the model may be restrictive compared to corn-ethanol industry expectations, the subsidies will undoubtedly drive higher demand for corn-ethanol. CORN FUTURES CONTANGO IS STEEPENING Corn Futures term structure has become noticeably steeper over the past three months. Premium for dated contracts have increased. Specifically, corn delivery in later part of 2024 and early 2025 command higher premium. MARKET METRICS ARE TURNING LESS BEARISH FOR CORN CME Corn Options positions are currently skewed bullish with a put/call ratio of 0.84. Over the past week, bullish positioning has increased with large call option buildup on June (OZCN4) and December contracts (OZCZ4). Asset managers have also started to reduce net short positioning on CME Corn Futures since positioning reached its all-time low mid-February. HYPOTHETICAL TRADE SETUP South America corn supply remains uncertain even as the US delivers a record harvest. Corn prices will remain bearish in the near term amid ample supplies. Longer term, supply shocks and rising demand has the potential to send corn prices higher. This is evident from steepening contango in CME Corn Futures. To express the view on corn prices increasing towards the end of the year, traders can establish a calendar spread comprising of short position in September 2024 futures (ZCU2024) and a long position in March 2025 futures (ZCH2025). CME corn futures offer deep liquidity even for contracts in 2025 allowing such calendar spreads to be executed efficiently. A hypothetical trade setup comprising of the calendar spread consisting of short ZCU2024 and long ZCH2025 also offers margin benefits. The calendar spread position is margin efficient with the entire position requiring margin of just USD 350 as of 15/April/2024. This position not only benefits from the supply trend but also the seasonal trend in corn prices. Corn prices tend to rise from October through February due to seasonal factors. Between April to September, prices tend to decline. This hypothetical spread is supported by both trends. • Entry: 1.06185 (ZCH2025/ZCU2024 = 485/456.75 as of 12/April) • Target: 1.076 • Stop Loss: 1.052 • Profit at Target: USD 323 (Target price = 1.33% higher than Entry => Profit = 1.33% x notional = 1.33% x (485 x Contract Size) = 1.33% x (485 x 5000/100)) • Loss at Stop Loss: USD 225 (Stop level = 0.93% below entry => Loss = 0.93% x notional) • Reward to Risk: 1.44x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Editors' picks
CBOT:ZCH2025
by mintdotfinance
8
Shrinking Inventories Lends Support to Oil PricesCrude oil prices have remained lacklustre and rangebound in 2024. Slow economic growth and abundant production have kept prices muted. OPEC's efforts of supply cuts haven’t helped. Neither have geopolitical tensions. Over the past two weeks, oil prices have once more started to pick up steam, supported by trend of shrinking inventory. Despite the price buoyancy, we expect prices to remain rangebound with supply and demand in balance. Yet even during these periods, positioning tactically can allow traders to harness positive gains. This paper posits a calendar spread in CME Crude Oil futures which provides a reward to risk ratio of 1.3x while remaining directionally neutral. PERSISTENT GEOPOLITICAL RISKS FAIL TO INFLUENCE PRICES While price, the options skew and IV may not reflect it, geo-political risk for oil supply has not dissipated. Geopolitics remains tense with the conflict in Ukraine and the middle east showing no signs of ending anytime soon. Cease-fire negotiations are stuck in a stalemate. Houthi rebels continue to target ships passing through the Red Sea. Conflicts are dragging on. The risk of escalation remains high. Earlier this year, Ukrainian drone attacks on Russian refineries reportedly destroyed approximately 12% of Russia’s total oil processing capacity. According to analysts , continued disruptions and attacks on Russian oil infrastructure is likely to pressure Russian production and exports. Confluence of these risk factors suggests the potential for upside risk in oil prices. Yet, IV does not reflect this sentiment. CVOL index for CME Crude Oil options is at a four-year low and skew is close to zero suggesting demand for call options remains subdued. Source - CME CVOL It is difficult to establish a directional stance based on geopolitical risks given the fragile situation. REOPENING REFINERIES PROVIDE MUCH NEEDED CRUDE DEMAND Towards the end of January, a divergence in crude inventories & gasoline stockpiles started to emerge. US crude inventories saw large buildups while refined oil inventories had large drawdowns. This suggested that while demand for crude products was strong, seasonal refinery outages meant demand for crude oil was subdued. The refinery outages were exacerbated by the cold blast in January which led to unplanned shutdowns. The impact – excessive buildup of crude inventories which led to bearish prices. At the same time, inventories of refined crude products like gasoline showed that demand at the downstream has remained strong. Gasoline inventories have fallen sharply over the past month and stand near their 5-year lows. Data Source - EIA Over the past month, though, refineries have come back online much faster than anticipated. Refinery utilization rate has surged from 80% in early Feb to almost 88% as of 15/March. Data Source - EIA Increase in refinery utilization has provided much needed demand for crude oil. Crude oil inventories have shifted from their huge buildups to drawdowns over the past week. At the same time, gasoline inventories continue to decline at a rapid pace suggesting strong fuel demand. Data Source - EIA In EIA’s weekly petroleum status report for the week ending 15/March, crude inventories fell more than expected (2 million barrels vs 900k barrels expected). The reason for the surprise – higher exports and refinery activity. This suggests that the demand for crude oil in the near term is stronger than many expected after the huge buildups in Feb. OPEC+ SUPPLY CUT EXTENSION FAILS TO ENTHUSE MARKETS At the meeting on 3/March, OPEC announced the extension of their voluntary production cuts till June. Cuts remain at around 2 million bpd, unchanged from previous guidance set in November 2023. Despite the extension of cuts, crude prices remained muted. According to S&P Global , many participants were already expecting the extension. Source - OPEC Monthly Report Moreover, the recent non-compliance of production quotas by some members has become a major concern. In January, OPEC members exceeded their quota by 139k bpd. In February, members exceeded their quotas by 208k bpd. Source - OPEC Monthly Report Most of the non-compliance is coming from a select few nations - Iraq, Kazakhstan, Kuwait, the UAE, and Gabon. Source - OPEC Monthly Report Over-production raises concerns over seriousness to production cut commitments and its long-term sustainability. It is likely that over-production and the eventual roll-back of supply cuts will lead to a higher supply of crude oil later in the year. HYPOTHETICAL TRADE SET UP In the near term, crude inventories are likely to see increasing drawdowns given the rapid ramp-up of refineries and persistently high fuel demand. Outages in Russia are also impacting near-term supply on a global scale. Yet the supply outlook later in the year is less promising. The compliance of OPEC+ supply cuts are fading. Seasonal trends show that crude inventories tend to rise during the summer. Data Source - EIA Investors can take advantage of these trends by executing a calendar spread consisting of a long position on near term CME WTI Crude Oil Futures and a short position on a later expiry. Though, the backwardation on crude oil has become steeper over the past month, it potentially has scope to steepen further. The following hypothetical trade comprising a long position on the near-dated contract expiring in April (MCLK2024) and a short position on the further dated contract expiring in May (MCLM2024) provides a compelling reward-to-risk ratio of 1.4x. A calendar spread using WTI Light Sweet Crude Oil Futures is directionally neutral. It is also beneficial from a margin standpoint. CME offers margin offsets for calendar spreads due to its relative lower risk profile of the trade. The spread requires maintenance margin of just USD 40. • Entry: 1.0063 • Target: 1.0135 • Stop Loss: 1.0003 • Profit at Target: USD 57.8 • Loss at Stop: USD 48.6 • Reward to Risk: 1.2x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
NYMEX:CL1!Long
by mintdotfinance
Natural Gas: A look at term structureLast week , we examined Natural Gas from a seasonality perspective. This week, we aim to extend that discussion and explore other ways to implement a similar view. To quickly recap: From a seasonality standpoint, we identified short-term opportunities for a downward move in Natural Gas. Factors such as higher-than-normal storage levels, unseasonably warm weather, and the typical price trends from December to January suggest a potential decline in prices. Additionally, prices have recently broken past initial short-term support, now trading below the $3 handle. Another perspective worth considering is the term structure. Term structure refers to the difference between futures prices of various maturities of commodity futures. It is visualized by plotting the prices of different expiry contracts, forming what we refer to as the term structure curve. The term structure reveals other insight that we can explore, starting with the basic slope, which can be categorized as flat, upward sloping, or downward sloping. Understanding these can reveal potential mispricing or provide a clearer picture of market expectations at different future points. Contango An upward-sloping term structure, known as "Contango", occurs where contracts closer to expiry are priced cheaper relative to those further from expiry. This can be attributed to factors like storage costs where contracts further from expiry might trade at higher prices due to the associated storage expenses. Sellers, therefore, demand higher prices to offset these costs. Backwardation A downward-sloping term structure, termed “Backwardation,” happens when prices in the near months are higher than those further from expiry. This might occur for various reasons such as a benefit to owning the physical material, also known as convenience yield or even just short-term demand pressures. Term Structure With a rough idea of contango and backwardation in mind, we can now look at Natural Gas term structure. The chart above shows the term structure for natural gas 1 year ago, 6 months ago and yesterday. Here we can see the 3 distinct shapes for the term structure, especially when we focus on the front part of the term structure. With the term structure a year ago deeply in backwardation, 6 months ago in contango and current term structure in a generally flat shape. We also observe that term structure shapes can change quite rapidly hence it can be valuable to look at the shape of the curve to place strategies on the term structure. For instance, if we maintain a short-term bearish but long-term bullish view, one strategy could be to short the front part of the curve while going long on the back part. This can be achieved by creating a Jan – Jun 2024 calendar spread, going short on the Jan 2024 contract and long on the Jun 2024 contract. What’s interesting when we look at the Calendar spread vs the outright price moves in the individual leg is that the direction of the outright contract moves generally dictates the direction of the calendar spread. Again, this could happen for a couple of reasons, one being that trading activity often concentrates on the front part of the term structure for liquidity reasons, hence, making the front part of the term structure generally more reactive than the back part of the term structure. But why trade the calendar spread instead of the outright? Reduced Margin Benefits of trading the calendar spread instead of the individual month contract include lowered margin requirements due to margin offsets from CME, reducing the margin needed compared to outright positions. Reduced sensitivity to risk/black swan events Both long and short positions in a spread will react together to risk events, albeit to different magnitudes, mitigating overall exposure. For example, during the Natural Gas rally in 2021, while outright prices increased from $2.5 to $9.5, the Jan – Jun 2023 calendar spread only increased by $1 over the same period. Similarly, on the decline, outright prices fell close to $8, but the calendar spread fell by only $0.74. This relatively controlled price swing allows for more manageable risk compared to outright contracts. Hence to express our short-term bearish but long-term bullish view, we can take a short position on the CME Henry Hub Natural Gas January 2024 Futures and a long position on the CME Henry Hub Natural Gas June 2024 Futures at the current level of 0.11. The same position can also be expressed using the newly launched (on 6 November 2023) CME Micro Natural Gas. At 1/10 the size of the full-sized contract, the margin requirements to set up a position become more manageable. Micro Natural Gas Futures Margin Requirements Alongside the lowered margin requirements, it offers the opportunity to tactically average into a position to achieve a better average entry price for the same amount of capital. Each 0.001 point move in the full-sized Henry Hub Natural Gas Futures is 10 USD while a move in the Micro Henry Hub Natural Gas Futures is 1 USD. The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com Disclaimer: The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description. Reference: www.cmegroup.com www.cmegroup.com www.cmegroup.com www.cmegroup.com
NYMEX:NGF2024Short
by inspirante
When Chips Are Down, They Rebound Slowly But StronglyWhen Chips are down; invest if you can and hedge if you must. Having soared in 2020 & 2021, semiconductor shares tanked brutally as tremors from geopolitics, sinking consumer confidence and bloated inventory struck. Q4 overhang is dragging the industry down in the near term, which might have set a bearish outlook in the short-term, but times are changing. Structural forces and business cyclicality are now becoming robust tail winds for semiconductors, bringing a bullish outlook in the medium-to-long term for the sector. Therefore, this case study argues that an asynchronous time spread in CME E-Mini PHLX Semiconductor Sector Futures ("CME Semiconductor Futures") could potentially deliver a 2.8x reward to risk ratio by first taking a short position in futures expiring in March 2023 followed by a path-dependant long position in futures expiring in September 2023. INDUSTRY ON THE CUSP OF A SUPERCYCLE Chips everywhere. Semiconductors are ubiquitous as products become sophisticated. Rapid growth of mobile devices, emergence of EVs, and rising cloud adoption have created endless demand for higher processing speeds and larger memory. Chipmakers have benefited from this trend. Anticipated exponential growth in consumer durables, IoT, gaming, EVs, and AI/ML will translate into strong sustained demand for chips. Speaking at World Economic Forum, Microsoft CEO Satya Nadella asserted that AI would go mainstream not in years but in months. Emergence of generative AI will form a fresh stream of demand for chips. EVs require twice as much chip content than traditional ones. Rising cloud usage will amplify demand from datacentres for graphics processing units (GPUs). In short, semiconductor industry is on the cusp of a demand super cycle. DEMYSTIFYING THE SEMICONDUCTOR INDEX The Philadelphia Semiconductor Index ("SOX") is a market capitalization-weighted index comprising of the top thirty (30) semiconductor firms listed in the US. Top names include Nvidia, TSMC, and ASML forming 48% of SOX. The top ten comprise 80% of the SOX. SOX rallied 202% from its low in March 2020 to its high in November 2021. As monetary policy shifted from QE to QT, SOX plunged 46% in 2022 touching its lowest level in October 2022. Since then, it has bounced back 43%, outperforming both NASDAQ-100 and S&P 500 which are up merely 10% during the same period. A CYCLICAL INDUSTRY Semiconductors industry is inherently cyclical given the considerable time lapse between spotting fresh demand and matching them with new supply. In a recent report, JP Morgan cited that semiconductor stocks are close to a cyclical bottom. Each time the industry hits a bottom, it recovers impressively. In one-year and three-years following a cyclical dip, shares in this sector spike 40% and 95% on average, respectively. While short term demand looks bleak on waning consumer confidence, the USD 600-billion industry's long-term prospect looks resolutely bright. LET THE AI WARS BEGIN Revolutionary AI: ChatGPT made its debut in November. It sprinted to a million users in just five days. The excitement in generative AI is palpable. It will revolutionise content generation while delivering vast productivity gains in others. Inflection ahead: AI is approaching an inflection point. Its usage is going mainstream. Expect tech giants to invest heavily to outcompete. If this marks the start of AI wars, the semiconductor firms that make AI work will harvest outsized profits. Shovel makers hit jackpot: During the gold rush, it was the shovel makers that got rich more so than the diggers. In this AI gold rush, the shovel makers (i.e., the semiconductor stocks) are set to reap enormous gains. Nvidia already shining: Nvidia is the market leader in GPUs whose parallel processing capabilities form the core for delivering AI. ChatGPT adoption alone could bring incremental revenues of up to USD 11 billion over the next year, Citigroup estimates. TSMC & ASML well positioned: Nvidia GPU production depends on two firms - (a) the Taiwan Semiconductor Manufacturing Corporation (TSMC), and (b) ASML Holdings (ASML). Berkshire stake in TSMC: TSMC recently announced stunning Q4 earnings. Its net sales grew 42.8% YoY, while its net profits & EPS were up 78% YoY contributing to an ROE of 26.4%. Little wonder that TSMC was one of Warren Buffett's recent investments where his firm acquired USD four billion of TSMC shares last November. ASML dominance: Meanwhile ASML commands a monopoly on key tech (Extreme Ultraviolet Lithography or EUV). EUV is used in producing cutting-edge nano chips that AI requires. ASML is set to secure a windfall on rising AI adoption. CHIPS ACT TO RESHORE PRODUCTION Supply chain disruptions caused by the pandemic exposed the vulnerability of over-reliance on globalisation. Russia-Ukraine conflict caused adverse impact with Russia being a major supplier of Palladium and Ukraine being a key source of Neon gas. To reduce over-reliance in a key industry, US last year legislated the CHIPS Act which is aimed at reshoring production on US soil supported by more than USD 150 billion of grants and tax incentives. NO PAIN, NO GAIN IN A V-SHAPED PATH AHEAD Supply ramped-up but a little too late: Clogged supply chains plus demand spike during the pandemic fuelled chip shortage. Ramped up production which always takes a long lead time arrived but at a time of pale consumer demand (PC demand down 28% YoY) late last year. Frail consumer sentiment: Persistent inflation, recession fears, and uncertain outlook, meant lower consumer durable sales. This has slashed demand for semiconductors resulting in one of the largest inventory corrections in the industry. The sector is cooling faster and getting colder than expected. Firms face a tough market saddled with excess inventory compounded by frail end-markets except for automotives. Downgraded chips: Intel reported a loss for Q4 last year and expects a weak first half this year with return to growth in second half. Earnings from other industry majors point to significant headwinds. Analysts have downgraded several chip stocks. Fund flows in ETFs: Fund flows into and out of leveraged ETFs this year show investor activity is moving in tandem with these macro shifts. The Direxion Daily Semiconductor Bull 3x ETF (3 times long exposure to SOX) suffered net outflows of $341 million while the Direxion Daily Semiconductor Bear 3x ETF (3 times short exposure to SOX) gained net inflows of $1.1 billion. Insiders are Net Sellers: Insider Activity among majors show that they have been net sellers over the last three months except for Qualcomm, Intel and Applied Materials. Bullish Price Targets: In sharp contrast to this gloomy outlook, analysts covering the top stocks anticipate an average +15% price gain over the next 12-months. TRADE SET-UP This case study proposes a two-legged calendar spread as set out below. Each CME Semiconductor Futures contract provides exposure to twenty-five (25) index points approximating to USD 75,000 in notional with required margin of USD 5,900. TRADE LEG 1 : A short position in the contract expiring in March 2023 will provide exposure to the short-term correction. Entry: 2978 Target: 2571 Stop Loss: 3180 Profit At Target: $10,175 Loss At Stop: $5,050 TRADE LEG 2 : A long position in CME Semiconductor Futures expiring in September 2023 will provide exposure to recovery in the latter part of the year. Entry: 2710 Target: 3718 Stop Loss: 2410 Profit At Target: $25,200 Loss At Stop: $7,500 Aggregate Reward-Risk Ratio: 2.8x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services. This material has been published for general education and circulation only. It does not offer or solicit to buy or sell and does not address specific investment or risk management objectives, financial situation, or needs of any person. Advice should be sought from a financial advisor regarding the suitability of any investment or risk management product before investing or adopting any investment or hedging strategies. Past performance is not indicative of future performance. All examples used in this workshop are hypothetical and are used for explanation purposes only. Contents in this material is not investment advice and/or may or may not be the results of actual market experience. Mint Finance does not endorse or shall not be liable for the content of information provided by third parties. Use of and/or reliance on such information is entirely at the reader’s own risk. These materials are not intended for distribution to, or for use by or to be acted on by any person or entity located in any jurisdiction where such distribution, use or action would be contrary to applicable laws or regulations or would subject Mint Finance to any registration or licensing requirement.
TVC:SOXLong
by mintdotfinance
2
Copper’s many tangosIn the following charts below, we will highlight why copper looks interesting to us right now. Firstly, the Copper Outright prices (orange) vs the Calendar spread (black). Copper calendar spread tend to move in-line with its outright prices, until major turning points, when the calendar spread leads the outright price movement. In February 2022, we observed the copper calendar spread making a significant move lower, with the outright prices following suit in April. With the calendar spread making a significant move higher now, is this what they call déjà vu? Secondly, copper prices and the Chinese Yuan have a relatively high correlation as China is the world’s largest buyer of the metal, and by a significant margin. The recent weakness in the Yuan has led copper prices lower, but with the CNYUSD pair seemingly recovering now, could some strength in the Yuan lead the copper rally? Thirdly, the Gold/Copper ratio generally trades within a pretty defined range, with out-of-range moves happening during major market events. The ratio’s recent high can be attributed to copper weakness compared with gold. With signs of the ratio retracing off the upper range, have we marked the end of this move? And is it time for copper to gain some ground against gold? Looking at the price charts, we see copper trading near the significant long-term support level of 3.3. Previous attempts to break this support in July and September were both rejected. On a shorter timeframe, we see a descending wedge pattern forming, which is generally considered a reversal pattern. The same setup is also observed on the Micro Copper contract, which offers greater flexibility and precision in execution. Copper’s interesting relationships with major currencies and commodities, allow us to analyze it from multiple angles. With some relationships at major inflection points now, we lean bullish on copper. Entry at 3.44, stop at 3.1335. Target at 3.8320 and 4.0000 . If you’re keen on understanding more about Copper and its many relationships, do check out our previous research piece: www.cmegroup.com The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com Disclaimer: The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios.
Editors' picks
COMEX:HG1!Long
by inspirante
13
PYPL Earnings PlayDescription: Neutral Calendar Spread, betting on a small move and sharp decrease in IV short term options following earnings on Monday. Long Call Calendar Spread Levels indicated by the triangle: Max gain occurs at peak Break-evens at the ends Expiration on the right side Break-evens 254.1, +9.8% 213.46, -7.8% R/R: ~5:1 Positive R/R, stop loss levels built into position. Intend to close before near term expiration. *Stops based off underlying stock price, not mark to market loss The Trade BUY 11/19 232.5C SELL 11/12 232.5C Only invest what you are willing to lose Break-evens and R/R vary on fill
NASDAQ:PYPL
by BarnardR
RBLX Earnings PlayDescription: Earnings after close today, taking advantage of high IV on same week options and covering with next week's (Calendar Spread). Long Call Calendar Spread Levels on Chart Break-evens 91.34 +16% 69.01, -12% R/R: ~4:1 Positive R/R, stop loss levels built into position. Intend to close before near term expiration. *Stops based off underlying stock price, not mark to market loss The Trade BUY 11/19 79C SELL 11/12 79C Only invest what you are willing to lose Break-evens and R/R vary on fill
NYSE:RBLX
by BarnardR
Roku Earnings PlayDescription: Earnings after close on Wednesday, taking advantage of high IV on same week options and covering with next week's (Calendar Spread). From Deltaone on Twitter: twitter.com 76% expect beat 9.5% move priced in 7.7% avg move post earnings in recent quarters Long Call Calendar Spread Levels on Chart Break-evens 344.96, +12.89% 275.74, -9.77% Downside also protected by support established in DEC of 20. R/R: ~5:1 Positive R/R, stop loss levels built into position. Intend to close before near term expiration. *Stops based off underlying stock price, not mark to market loss The Trade BUY 11/12 307.5C SELL 11/05 307.5C Only invest what you are willing to lose Break-evens and R/R vary on fill
NASDAQ:ROKU
by BarnardR
6
AAPL Same Week Long Call Calendar SpreadDescription: Earnings after close, taking advantage of high IV on same week options and covering with next week's (Calendar Spread). Long Call Calendar Spread Levels on Chart R/R ~4:1 Positive R/R, stop loss levels built into position. Conveniently, Break-evens: 158.99, (2 stdev from open) 146.33, (~80% of 1 stdev from open) Intend to close before near term expiration. *Stops based off underlying stock price, not mark to market loss The Trade BUY 11/05 152.5C SELL 10/29 152.5C Position Addition: Will be running a limited amount of capital in additional same week OTM long calls to position for additional upside. These will be purchased at EOD. My Position: BUY 10/29 160C *The amount I am buying of the OTM calls here is equivalent to ~15% of total position size. Estimated Position Delta: .09 As you can see, my long long bias is negligible to the overall strategy. I will update with my fill and delta when I open the additional long calls.
NASDAQ:AAPL
by BarnardR
1
$NET Earnings Play + How to Trade Earnings In General(Note that I am writing this idea about an hour after market open when $NET is trading around $90) Thought I would publish a quick idea on how I like to select and play earnings on stocks. $NET looks like a decent candidate as an example and actual trade. Earnings reports represent an opportunity for a BIG move, but we just don't know WHICH direction. Many newer options traders like to buy single-legged options (calls or puts) at very near expirations to express a hunch or opinion on direction. The options appear cheap with HUGE payouts if you hit a home run. But those are overwhelmingly losing trades, even when you get the direction right. Why? Implied Volatility (IV) gets absolutely JUICED for earnings plays. For example, suppose I am bullish on $NET earnings and want to buy a call- Buying the ATM $90 Call for 2/12 expiration means $NET needs to move up to $95 just to breakeven, and about $100 to give you about a 1:1 reward to your risk ($520 profit to your $520 debit paid) Buying an OTM $100 Call for 2/12: breakeven is at $102, $104 is 1:1 R:R If you think going out to the next further expiration is better, it's not. The 2/19 expiry on those same strikes produces similar price points to breakeven and 1:1 profit ATM Call for next week's expiration OTM Call for next week's expiration To some that trade might not look that bad, but what is not shown on these charts (generated from theoretical calculators) is the impact of IV Crush . If we close today at $90, ER happens after today's close, and we open tomorrow around, say, $95, and close around $93, those calls are going to lose most of their value . The reason for this is people paid(really, over-paying) for a big move that did not seem to come. Most earnings have their biggest moves AT earnings, not a week after. The momentum is largely lost. Impact of Implied Volatility, IV Curve, Implied vs Actual moves for previous earnings Unless you have a crystal ball for direction, you generally want to buy or sell volatility based upon the expected magnitude of event What this means is if currently the IV is sky-high up front and absolutely plummets in the months afterwards, you look to see what previous moves did vs what their implied moves did. I look at MarketChameleon.com for this. If the actual move of the last 12 earnings as well as the average move is about equal to or less than the implied move was, generally people are over-estimating the magnitude of the move The IV Curve/term structure gives you an excellent opportunity to buy or sell volatility on one term relative to another. If IV has been climbing and looks like its cooling off, you sell it. If IV looks like its been calm and is starting to climb up, you buy it. This is explained best buy buying a straddle at one term and selling a straddle at another. More common term structure. Implied Volatility is relaxed but expected to rise -sometime- in the future. Term structure you get with most earnings events or when Reddit wallstreetbets gets obsessed with a stock. What are 'IV30', 'IV60', etc? Options are instruments of TIME Because they are instruments of time, we are always looking at the price of something relative to the future, and the future is generally different Options Expirations (OPEX) dates, usually the monthlies. For stocks they are very interested in OPEX dates occurring around special events like an earnings report, dividend, or some kind of conference, results of a trial, economic event, and etc. Generally options markets are looking ahead at intervals of about 30 days. You see this with CBOE's $VIX index, which tries its best to reflect the outlook 30 days from now (Per CBOE FAQ on VIX: "Only SPX options with more than 23 days and less than 37 days to the Friday SPX expiration are used to calculate the VIX Index. These SPX options are then weighted to yield a constant maturity 30-day measure of the expected volatility of the S&P 500 Index.") Here's how I am playing Cloudflare $NET earnings- Sell a straddle for next Friday (surprise surprise). Tomorrow's expiration is absolutely jacked on IV juice, but it is a little TOO near for my liking. What if NET moves up to close at $110 tomorrow, but if I had just one more week it could've settled closer to $100 and made me a profit? Tomorrow's expiration IV is 170, which is about 40% more than next Friday's 120, and will surely get crushed extremely hard if it doesn't produce a good move, but I get 30% more premium selling next week's expiration (2/19), and that one will also plunge if there's a non-move We buy a straddle at a further out expiration, one where the IV is far lower The idea here is that we are mostly playing Theta/time. The hope is that if the stock doesn't move much the value of the near-term straddle sold goes down significantly, while the far-term we bought goes down, but not as harshly. There's also potential for the IV curve to balance out so that the near-term lowers a bit while the far-term rises a bit, giving value to our long straddle while leeching the near-term straddle we sold Here are some guidelines playing with Double Diagonals/Calendars- Set a limit buy on the option you sold to buy it at $0.05, Good Till Closed. If you're short on an option and its basically lost all that value, take your risk off the board for a measly 20-something dollars. Who knows if you celebrate early and then a massive move happens, you could have just eliminated that risk potential (Remember to close your long one as well, or replace the short you closed with a new one) I like to close the spread before expiry and not allow an ITM option to be exercised. That adds another dimension of complications most are not ready to deal with Consider rollouts. If you sell the 2/12 or 2/19 and we get a nothingburger, most of the crush has probably happened by tomorrow's open. You buyback (Buy to Close) your $90 call and put and now sell (Sell to Open) a later expiration date, like the 2/26 or even the 3/19 (if you did a diagonal, this would make it an Iron Butterfly, if you did not you cannot sell the $90s since you are already long, you'll have to roll those out) In the rollout scenario, it is sometimes pretty ideal to have your long straddle be at a much further out date because you can rollout your short straddle several times I find that generally you are much more protected on big moves to the upside, less so to ones on the downside. This is related to a number of things like Implied Volatility, Skew, etc, but it's not a bad idea to place your straddle a bit lower rather than higher. Look at your Theoretical Options Calculator and see what is the most likely scenario Good luck and happy trading. Please let me know if you have any questions, comments, etc. I am always learning and am susceptible to writing something incorrectly or even having a misunderstanding of things :)
NYSE:NET
by chrism665
11
Options Idea: Buy The Oct '20 JWN Call Calendar Spread @ $2.35Nordstrom has been a big loser since COVID-19 and is on a long-term downtrend. However, it's been on a short-term uptrend since late August and just blew through its July highs. The next objective will be the early August highs around $17.50. Our goal is to ride the short-term trend for as long as it lasts during September and October. We don’t want to own this stock long-term, but we’ll hitch a ride on this short-term trend with a long-call. Since we’re not long-term owners of JWN we’re buying an Oct. 16 2020 call and we will sell weekly out of the money calls against it to lower cost basis. Look at the yellow trend line for a reference as to where JWN might be and that’s the area to sell weekly out of the money calls against this long call. Make sure your weekly short calls don't run up against the trendline. Here’s how we set-up the trade: Sold the September 11, 2020 $17.5 Call @ 0.25 Bought the October 16, 2020 $15 Call @ 2.60 Our objectives for short call income generation against this position are as follows: Initial Objective: $1.23 (Extrinsic Value of Long Call) Stretch Objective: $2.60 ($0 capital outlay) We on the way toward meeting our initial objective by selling the Sep 11, 2020 call at $0.25 and next week we’ll sell another weekly out of the money call to get closer to our initial objective. 20-JWN-01 Opening Date: Sep 8, 2020 Expiration Date: October 16, 2020 DTE: 38 IV: 93% IV Percentile: 56% Odds of Winning: 36.60% (before selling more short calls) Odds of Losing: 63.40% (before selling more short calls) Win: > 17.35 @ Expiration (before selling more short calls) Loss: < 17.35 @ Expiration (before selling more short calls) Cash Requirements: $235 Chart Legend Green Area: 100% Win Zone. If we finish above or in the green area, we’ve made a profit on our trade. Since our position has a long call that means our potential gain is unlimited after Sep 11, 2020. Up to Sep 11, we are limited in our gain by our short call. Red Area: If we finish in this area we have a loss. The size of the red area is the size of our maximum loss. Since we have no uncovered options, our loss is limited on this trade to the price of our long call minus the credit taking in on our short calls. 1 standard deviation, 2 standard deviation, 3 standard deviation projections from Opening Date to Expiration Date are included. Make sure to follow us on Tradingview for updates on this idea as we continue to reduce our cost basis in this trade.
NYSE:JWNLong
by OptionsCoach
$EEM Iron Butterfly OpportunityIf you follow my ideas you know that I like to be neutral more often than not. I originally was looking at a Calendar spread for $EEM but decided that an Iron Butterfly would be the better trade. It has wider breakevens to cover the majority of the recent range, as opposed to the Calendar, which would require an increase in IV to expand its range. Typically, IV rises when price drops, so Calendars should be slightly short, which I don't want to be here. 8/23 weeklies have attractive pricing.
AMEX:EEM
by BpowersCLT