Closing the Gap - Futures Edition

Crude Strategies

| Jun 20, 2014
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    Closing the Gap - Futures Edition

    Crude Strategies

    Jun 20, 2014

    This segment introduces trading multi-option months together, or calendar spreads. But unlike stocks, /CL has different future prices and different expiration months.

    Pete introduces the segment by explaining backwardation and contango, depending on whether the front month is trading higher or lower than the back months respectively. With both futures and options trading in multiple months, it’s possible to make trades that take advantage of differences in volatility across the varying expirations. With crude oil, like most tradable commodities, there are often shifts in short-term supply and demand, which can have a large impact on volatility across expirations. At the time this segment aired, there was fear of short-term supply disruptions for crude oil, which created a wider spread between the July and September /CL contracts, where the September contract was trading at a discount to July.

    With the volatility in the Crude market and the spreads between the front and back months, we can look to several possible strategies including calendars, calenderized strangles, calendarized straddles, and horizontal short verticals.

    Pete breaks down several current examples of these strategies, first looking at a calendar spread where we can by a 1 strike In the money call in a longer dated cycle and sell an out the money call in a closer expiration.

    Next, the boys look at a calendarized strangle, selling a closer dated call but a further out dated put (Aug vs Oct in this instance). They look at the same setup with the straddle, selling the Aug at the money call and the Oct at the money put. A similar set up is adopted for the horizontal iron condor trade, the guys look at selling the Aug call spread combined with the Oct put spread.

    This is a terrific segment for anyone interested in learning more about strategies using crude oil futures and the options on crude oil futures.

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