Friday, August 17, 2018

#WTI #RBOB simple crack spread #trade explained & trade example

In the oil industry cracking is the process whereby crude oil is separated into refined products.

In trading "Crack Spread" is the difference between the cost of the oil products such as heating oil, gasoline and the cost of oil from which these products were cracked.

"Crack Spread" is not really for retail trading because of liquidity and capital issues. However, a retail trader can trade "Simple Crack Spread” using pretty liquid /CL and /RB futures. 

/CL contract is for 1000 barrels of WTI oil and is priced in $USD/barrel; /RB contract is for 1000 barrels of RBOB gasoline and is priced in $USD/gallon. 

To price "Simple Crack Spread"  between 1000 barrels of RBOB and 1000 barrels of WTI in $USD/barrel one has to use the following   formula:

Simple Crack  Spread = 42*/RB - /CL.

$1 move of Simple Crack Spread price translates than into $1000 move of cash. TOS trading platform can be used for charting the formula.

In general Simple Crack Spread is positively correlated to macroeconomic strength and specifically to WTI trend. Typically summer is a period of a strong WTI-RBOB crack spread. Supply issues like caused by Colonial Pipeline fire in 2016 or by hurricane Irma in 2017 result in violent price upswings.

The trade posted here was  a bet on summer seasonality and current bull market in WTI:

Exec Time Spread Side Qty Pos Effect Symbol Exp Strike Type Price Net Price Order Type Crack
5/4/2018 12:55 FUTURE SELL -1 TO OPEN /CLN8 18-Jul FUTURE 69.67 69.67 MKT
5/4/2018 12:55 FUTURE BUY 1 TO OPEN /RBN8 18-Jul FUTURE 2.1169 2.1169 MKT

Exec TimeSpreadSideQtyPos EffectSymbolExpStrikeTypePriceNet PriceOrder TypeCrack
5/7/2018 15:00FUTUREBUY1TO CLOSE/CLN818-JulFUTURE69.869.8MKT
5/7/2018 15:00FUTURESELL-1TO CLOSE/RBN818-JulFUTURE2.12322.1232LMT

P.S. Never forget about risk management.

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