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Underneath Brent Calendar Spreads

Nathaniel TMK

Nathaniel TMK

Click Monkey
Joined
4/1/12
Messages
6
Points
11
I just started trading Brent calendar spreads, and I am having a hard time understanding how it works. My Manager keeps saying the underlying assets are Brent outrights, and to keep trading as usual, but its still not clicking with me.
Let's take as example the front month of the Brent calendar Spreads:
MAY 2012 trading at 123.01-123.02
JUNE 2012 trading at 122.01-122.02
Buying at 1.01 & selling at 0.99
At those prices, if I hit the market simultaneously in both directions, I would be losing 2 ticks.
In the real market I lose 1 tick. If I simulate the Spreads with bigger price gaps, its even worse. When I compare the price ladders and price tickers of the spreads, there are incoherences. Big 250 lots in the spreads market would not be sweeping the actual brent markets causing a lot of imbalances in the system.
My manager tells me that the "implieds" by the exchanges are the one taking care of those "imbalances".
I do not think its the case.
I have a theory that there are Options underneath those spreads, with hidden premiums paid out to balance out the problem above.
If any of you quant geniuses could clarify this problem for me that would be very helpful.
 
Nathaniel TMK said:
I just started trading Brent calendar spreads, and I am having a hard time understanding how it works. My Manager keeps saying the underlying assets are Brent outrights, and to keep trading as usual, but its still not clicking with me.
Let's take as example the front month of the Brent calendar Spreads:
MAY 2012 trading at 123.01-123.02
JUNE 2012 trading at 122.01-122.02
Buying at 1.01 & selling at 0.99
At those prices, if I hit the market simultaneously in both directions, I would be losing 2 ticks.
In the real market I lose 1 tick. If I simulate the Spreads with bigger price gaps, its even worse. When I compare the price ladders and price tickers of the spreads, there are incoherences. Big 250 lots in the spreads market would not be sweeping the actual brent markets causing a lot of imbalances in the system.
My manager tells me that the "implieds" by the exchanges are the one taking care of those "imbalances".
I do not think its the case.
I have a theory that there are Options underneath those spreads, with hidden premiums paid out to balance out the problem above.
If any of you quant geniuses could clarify this problem for me that would be very helpful.
Click to expand...
Hi, I have been trading brent calendar spreads on ICE for 5 years now. I would tend to agree with what your manager says.
Moreover brent calendar spread options are not as active compared to Nymex WTI spread options.
I am not exactly able to understand your conspiracy theory so can't comment much on your views :)
 
darth said:
Hi, I have been trading brent calendar spreads on ICE for 5 years now. I would tend to agree with what your manager says.
Moreover brent calendar spread options are not as active compared to Nymex WTI spread options.
I am not exactly able to understand your conspiracy theory so can't comment much on your views :)
Click to expand...

Its not a a conspiracy theory, I am just trying to build a model of the Calendar Spreads to better understand them.
I would like to know if the Spreads consists of its underlying outrights, or if it is a synthetic product.
If it is the first case, then why the discrepancies when I execute theoretical simultaneous buys & sells.

I don't wanna be one of those traders who make millions, but can't differentiate between livestock and preferred stock.
 
See... those spreads are exchange quoted.... But obviously they are based on the underlying contracts.... Now if you can make a better spread through outrights ( which will never be the case as second month will have a large bid -offer gap and moreover implieds will never let this arb happen ), you can always arb :)

I get a feeling you are working for GHF?
 
Nathaniel TMK said:
I don't wanna be one of those traders who make millions, but can't differentiate between livestock and preferred stock.
Click to expand...

So would you rather be someone who can differentiate between livestock and preferred stock but can't make millions?
If some one is trading LIBOR , how does it matter if he knows livestock from preferred stock :)
 
darth said:
See... those spreads are exchange quoted.... But obviously they are based on the underlying contracts.... Now if you can make a better spread through outrights ( which will never be the case as second month will have a large bid -offer gap and moreover implieds will never let this arb happen ), you can always arb :)

I get a feeling you are working for GHF?
Click to expand...


How did you know that? Throw a stone into the Ice futures and chances are you will hit a GHF guy right? Lolz

I'm not exactly looking for arbs opportunities, but if the two products are indeed independent, but converge at the end of the month for delivery, there should be some lag between them that could be a useful indicator.
 
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