Wednesday, June 27, 2007

Being Long and Short

More by accident today I discovered an interesting way to trade oil. Actually it's Light Sweet Crude I'm talking about.

Light Sweet Crude is traded with good volume on NYMEX and on IPE. The contracts are actually identical. Meaning they show no spread to one another. The spread may be at times 0.01 or 0.02 because an Nymex the Ask is hit while on IPE the Bid trades. But otherwise both contracts usually show even identical Bid and Ask prices.

Current frontmonth contracts are

CL Q7 on NYMEX and WTI Q7 on IPE

Let's say you have a tradeplan which allows for bigger swings to avoid unneccessary Stops. I regularily read Phil Flynn's Energy report and noticed him taking usually 50 to 100 tick Stops and averaging into his trades. 50 to 100 ticks is quite huge and you earnestly can ask yourself whether there really is no countertrend to exploit before the initial trade works out. Now you could take your trade at the signal and add at -30 with your stop at -50. This quite often works in oil. But as I found out today a much more interesting way to trade is

1. Take a Long CL Q7 when you get your Long Signal on your long term chart

2. If it works fine, if not take a Short WTI Q7 the moment you get the Short Signal on the shorter timeframe chart

3. Ride the Countertrend as long as it goes (and that might be farther than you thought when taking the initial position)

4. Cover your Short WTI Q7 and now add to CL Q7 or keep the WTI Q7 Short open and add to CL Q7 if you are not sure whether the Long Signal is a real one or not. Now manage both the Long and Short position. With crude ranging usually 20 to 30 ticks you might be able to squeeze out twice the points you usually get.

The reason being that psychologically you have 2 positions. One profitable, the other at a loss. And you will notice that you see these 2 positions quite differently, even when you know, that these 2 positions are in the same contract and you have to look at the sum of both positions to know whether you are in a profit or loss.

7 comments:

Anonymous said...

Good Point. This way of trading works just like delta neutral in option strategy.

I'd been using almost the same strategy with ER2/ES/YM(future/future option) to hedge my swing position and taking profit on both down/up side.

Another plus by using ER2/ES/YM to hedge each other is the long/short position with offset the margin requirement.

Nice Job

jh007

Anonymous said...

Croc,

Once again you've illustrated a point about your trading that mimics strategies that I've used. Though I have not used the NYMEX/ICE method you elaborated upon, I have used similar methods for just about every instrument traded. Brilliant minds think alike! Have a Guinness (or I guess a Paulaner Hefe Weissen would be more appropriate) :)

Iceman

Globetrader said...

nice...just found out that the game I'm doing with CL and WTI (offsetting a Long in CL with a Short in WTI if need be) can as well be made with NG and QG with the benefit of lower margin: 1 NG = 4 QG If you take 1 NG long and go short 4 QG then the margin is reduced to 320 USD for the whole position

Anonymous said...

Hello Croc,

What is your feed for CL ?


Thanks for your work

Eric

Gary said...

It still comes down to eventually one thing, sooner or later you have to make up your mind, do you want to be long or do you want to be short..the only effective thing you have accomplished is doubling or tripling your commission cost...Peaktrade

Globetrader said...

Hi Eric,

I'm using Interactive Brokers (http://www.interactivebrokers.com) as my broker and as datafeed for my chartprogram, which is Ensign Software (http://www.ensignsoftware.com)

chris

Anonymous said...

Croc,

I have Ensign+IB.

But DTN refresh destroy my CL graph, I don't understand ...



Eric