The equity markets are currently in a period of low implied volatility (IV), but Crude Oil Futures are still in play. Are there any interesting strategies in /CL?
Mike Hart, aka Beef, from our research team, had some ideas about using Futures Calendar Spreads, and the first place to start was with the Futures curve. The futures curve for any commodity shows how the market is pricing it in the future. When trading any commodity make sure you understand the curve. Crude Oil is currently in contango because storage space is limited, leading to more expensive Crude Oil futures prices. An increase in storage capacity and/or a rise in prices could cause the curve to flatten. Understanding such factors can be applied to other commodity curves and the Treasury curve.
One strategy we can use is that of a Futures Butterfly, a spread using 3 different Futures contracts with 3 different expirations. These Butterflies are not like equity option Butterflies, which are constructed with 3 different strikes in the same expiration. A Futures Butterfly is constructed using three different months.
Mike laid out his trade and the reasoning behind it. It was a Crude Oil Futures Butterfly that was constructed by buying one December 2016 contract, selling two December 2017 contracts and buying one December 2018 contract. The most efficient way to establish the position would be via a Dec16 - Dec17 spread and a Dec17 - Dec18 spread. An advantage of this over a straight futures position is that it requires much less margin, and if we are right leads to a higher return on capital (ROC). The term structure does add complexity and there is some legging risk but those disadvantages are smaller.
For more on Crude Oil Spreads see:
What Else Ya Got? on November 7th, 2014: "Crude Oil Calendar Spreads"
Closing The Gap Futures Edition on March 20th, 2015: "Oil Calendar Spreads"
Market Measures on February 5th, 2016: "Crude Oil Calendar Spreads"
Watch this segment of “Market measures” with Tom Sosnoff, Tony Battista, and research team member Mike Hart (Beef) for the valuable takeaways, a better understanding of the Crude Oil Futures Curve and how to use Futures Butterfly Spreads to trade the curve.
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