Despite the potentially market-moving news this week that included many earnings reports, and FOMC meeting and a Presidential address to Congress, CME Group markets were relatively quiet again today. A couple of notable exceptions were the energy markets where both WTI Crude Oil and RBOB Gasoline futures prices were up by about 2% and 1.5% respectively and Bitcoin futures prices, which fell by over 4%.
With the move in the Energy markets, WTI Crude Oil futures prices have risen by about 35% since the beginning of the year and RBOB Gasoline futures prices have risen by about 41%. Incidentally, this brings up a popular spread trade in the futures markets that we’ve talked about here in the Key Takeaways section from time to time: the “Crack” spread. Essentially, this is a measure of the price of WTI Crude Oil relative to the products into which it can be refined, such as Gasoline. Using QuikStrike, we graphed the spread in the image below and, as you can see, Gasoline is trading almost as high relative to WTI Crude Oil as it has in two years. Many traders find this relationship interesting because of the many factors that can affect it such as supply/demand, storage and geo-political consideration, among others.
And now, for the answer to yesterday’s “Question of the Day”:
The answer to yesterdays’ question was “A” (55,431). The reason is actually very straightforward though we included a lot of information about the option pricing that was unnecessary to answer the question. Remember, the hypothetical position was long the 55,200/55,700 Call spread for which our hypothetical trader paid 231 points. Since the question was what the price of the futures had to be at expiration in order to break even, we only need to consider the intrinsic value of the option since, at expiration, there would be no extrinsic value. Therefore, since we were long the 55,200 Call and paid 231 points for it, a futures price of 55,431 (remember we ignored any transaction fees) would produce exactly 231 points of intrinsic value, making our P&L zero. Incidentally, the 55,700 Call (which our hypothetical trader was short) would expire worthless as it expired out of the money.