Spread Trading - Wti Crude Oil

By Craig Bewick
FEB 22 2021

Happy Monday!  US Equity Indexes began the day lower and ultimately wound up mixed with the Dow rising slightly and other major indexes declining.  Relatively, the E-mini Nasdaq-100 futures price was down more than the others at over 2.5% while 30-day implied volatility in the E-mini Nasdaq-100 options rose from 22.7% to 26.5%.  Other notable price moves at CME Group today included:

  • WTI Crude Oil futures which were up another nearly 4%
  • Gold futures which reversed recent declines and were up 1.75%
  • Bitcoin reversed recent gains and fell about 3%
  • Ultra Bond future price was down over 1 point as yields at the long end of the curve continue to rise
  • Copper futures, already near 10-year highs as we talked about Friday, rose again by about 1%

Instead of looking more closely at one of our options products today, we’re going to take the opportunity to talk about spread trading using the recent rallies in WTI Crude Oil and RBOB Gasoline futures prices.  As we’ve mentioned in the Key Takeaways section, many professional futures traders use relative value or spread trading in their trading strategies.  This typically involves buying one or more and selling one or more products simultaneously.  One interesting example is trading WTI Crude Oil futures against a product made from it like RBOB Gasoline, in what is known as a variation of the “Crack Spread”.  As you can imagine because one is made from the other, a price relationship between the two products exists and is tracked by traders as well as commercial users of the product.  We used the QuikStrike “Spreadbuilder” tool to graph the price relationship of these two commodities over the last 12 months. You’ll note, we multiplied the price of RBOB Gasoline by 42 because there are 42 gallons in one barrel of WTI Crude Oil.  As you can see, the price of gas relative to oil is currently as high as its been in the past year.  Factors that can impact the level of this spread include the demand for refined products like gas versus that for crude oil as well as disruptions to refining capabilities that can occur during natural disasters or accidents that can limit refined product supply.  Remember, CME Group lists both standard and mini WTI Crude Oil futures products, options on WTI Crude Oil and RBOB Gasoline futures on its central match engine, Globex, for those wishing to gain exposure to these markets.  You can read more about spreads involving WTI Crude Oil here.

ABOUT THE AUTHOR

Craig Bewick has spent 25 years in futures and options markets, starting at CBOT and CME working in risk management, regulatory, technology, product management and client development. 

Connect with Craig at activetrader@cmegroup.com

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