Friday, May 30, 2008

Long CL, Short COIL

Talking about change. I tried something new for me today. I had discussed it here and here a year ago or so, but it was only theoretical then.
I was long oil (CL at 127) on a possible spike up. It was a fake and CL broke down fast 40 ticks.


Remembering yesterdays sell-off, I did not add to the position, but I hesitated to get out.
A familiar problem, as I was up for the day and did not want to close the week on a losing trade, especially one which wiped 40% of my daily profits.
I had the Brent oil contract (COIL) available for trading as well on my tradedesk and instead of covering the losing CL trade I shorted COIL.

I was now Short COIL, Long CL, which froze my exposure to the 40 ticks or more accurately to the spread between COIL and CL, which actually widened in the breakdown to about 60 ticks max. as COIL was stronger than CL today.
When CL could not take out the 125.10 mark and then held above 125.40 I covered COIL for 100 ticks profits and stayed in CL.


(I hoped I had timed it right and we would not break further)

It was the right decision and when we came back to 126.10 I closed CL for a 90 tick loss (we had spiked above 126 and I had moved a trailing stop to 126.10 as I did not want to sit through another test of the lows)

(A look at the chart confirms that I should have had conviction and stayed with the trade, but you never know, and I was happy to have successfully traded something I had thought about a year before, but never got around to really trade it.)


In the future I will actually use the WTI contract to offset a CL position, as this is also a Light Sweet Crude contract, which trades 1:1 with CL, just the spread is a bit higher. But using WTI to offset CL freezes the Loss effectively, even in a very fast market and that would have allowed me, to squeeze some more ticks out of the Short position.

Being in a position focuses a lot better than when you sit on the sidelines. I know, that had I taken the loss of 40 ticks, which most readers will recommend and gone short, I would have made a lot more. But you don't know that in advance and actually I need time to refocus after a big loss, I don't reverse a 40 tick loss. I go flat, and I would have remained patiently on the sidelines through the breakdown and the recovery without taking a trade unsure when CL would reverse on me again.
Taking the Short put me on the sidelines, while still exposing me to the market, while still forcing me to focus and make decisions. It was difficult to see that deep red CL position and it's true that the offsetting profits in COIL did not seem so big. Only the look at the total confirmed, that my exposure was not changing, even if CL showed me a -190 ticks at one time.
I won't trade that way every day, but in a fast market it's a good tool to have available I think.

Btw: I did not worry that I couldn't make back the initial 40 tick loss, because CL swings usually 60 to 100 ticks even if you are in a countertrend trade. The only thing is, that you need to get within the current swing range with your open position to be able to close the trade at a profit. Adding to a trade is one way, being long and short at the same time another and that way actually brings down your entry price a lot faster, if you are on the wrong side of a trend move.