We have previously discussed different Pairs Trades in the Futures markets. The Crack Spread is based upon the refining process of Crude Oil (/CL) into Gasoline (/RB) and Heating Oil (/HO). The Crush Spread is based upon the processing of Soybeans into Soybean Meal and Soybean Oil (/ZL). You might be surprised to learn that there is a connection between the two. There actually is a trade between Crude Oil and Bean Oil. Pete Mulmat, our in house Futures expert, joins the guys to explain things and proposes a trade you may want to try.
The connection is that Soybean Oil is often used in vegetable diesel. Pete displayed a chart of Crude and Bean Oil which showed how they tend to move together. Another chart displayed the growth in Crude Oil inventories. A table explained how to adjust each contract in order to trade “apples to apples”. The formula used is Bean Oil divided by 100 minus the result of Crude Oil divided by 300. A chart of the spread demonstrated how Soybean Oil has gained on Crude in recent months. On the same slide Pete provided two tables. One listed the 1-month, 3-month, 6-month and 1 year correlations between the two. The other listed all the contract specifications.
Pete then revealed his trade idea and further explained his reasoning for choosing the ratio he did. A table listed the number of contracts, the contract month, price, the Delta for each, the margin and the total Buying Power Reduction (BPR). A final chart demonstrated the 10 day ranges that have occurred in the spread.
For more on the subjects covered in this segment see:
Closing The Gap - Futures Edition from April 1, 2016: "Slipping Through the Cracks"
Closing The Gap - Futures Edition from April 22, 2016: "Soybeans vs Corn: Who's Hungry For Opportunity"
Closing The Gap - Futures Edition from May 27, 2016: "Soybean Crush Spread"
Closing The Gap - Futures Edition from June 3, 2016: "Crack Spread"
Watch this segment of Closing the Gap - Futures Edition with Tom Sosnoff, Tony Battista and our Futures expert Pete Mulmat for the key takeaways and an interesting Pairs Trade idea that you may want to try.
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