I screwed up, bought CL but now steep contango, what happens before expiry?

[Tomaz Korosec + 3]

Hello,

 

I went long oil with intention to hold for long term, because I see price in 2 years or sooner to raise back to 50$. But the problem is steep contango. Front month future expires in 11 days and a few days back contango was 4$, then 5$, now it is already 6$.  I do not have much experience with CL futures and rolling specially in such steep contango scenarios. So can some of more experienced traders please chime in. What happens a day or two before expiry? Will contango gets steeper and steeeper so I better close the trade? How would you invest for long term in you expect 50$ oil. Is it better to just buy XLE or similar ETF expecting stocks to bounce as crude oil bounces. I fear I will just roll to next month future, buying it for 29 when spot price of oil currently is 23 and then next month future too will come down to 23 or so so I will keep loosing more and more money even when SPOT price will not change much..

 

thanks for help

 

Tomaz 

[Fazeel Rehman + 2]

My broker offers auto rollover for free to next future contracts with no impact to my contract or equity value. I have the same position as you, where I have taken a long position on May 2020 Futures. 

My positions are at 22.00, 24.00, 25.00 and 26.50 400 Barrels each so running unrealised lossed right now.

[Fazeel Rehman + 2]

https://www.plus500.co.uk/FAQ/FinancialInstruments/WhatIsARolloverAdjustment

[Tomaz Korosec + 3]

I think you made the same mistake as I did. It is not the cost of the roll, I have an account with IB and it costs me 2$. The problem is when current contract expires, you will have to sell it for lets say 23$ and instantly buy June 2020 Futures for 29$.. Because it trades 6$ higher than May contract.. So you will loose 6.000$ on 1 contract, now multiply this by the nr. of contracts.. Sure if CL then goes from 29 to 35 you make it back. But it can as easily falls back to 23$.  So now you have loss from roll and loss from SPOT price falling. I miscalculated this shit too since I never traded CL before and also CL was never in such steep contango before. At least not in past few years.. We are screwed I think

[Fazeel Rehman + 2]

I see what you are saying. Which broker are you using if you don't mind me asking? Also can you see the link I have posted, as the broker says it will make the rollover adjustment so my equity and value of my open position remains the same. Or am I interpreting it incorrectly.

Edited April 11, 2020 by Fazeel Rehman

[FlagshipShow + 3]

Hey. I just signed up on the board but am on ST  and a few other boards. The reason the spread is so wide right now is due to USO rolling over massive amounts of contracts. They roll on the 5th-9th business day. The spread should narrow tomorrow night because they only roll on business days. Also this deal, if Saudi’s can get over how Mexico gets to its numbers, will give us a pop.  Because the front contract has more liquidity, it will rise a little further. Because June is also inside the 2nd quarter I believe that  the spreads will converge toward current spot price.

So...Sunday is a good day for an exit if it pops and then wait for the good news to wear off and jump back in on June contract. Or just wait through it. USO (and other funds) will be done by next week. But remember, other retail guys will be rolling over the closer we get to the 20th...

Good luck

[Fazeel Rehman + 2]

Tomaz where are you geographically  based? In US or UK? I have double checked with my broker in UK that automatic rollover to the next future contracts will have no impact on my equity, value of portfolio or my PnL. He said the difference between the settlement rate of exiting contract Vs the rate of the new contract will be debited or credited to my account such that there is NO change in my account. This is explicitly written on their website link I shared earlier. 

Is it US brokers who does not offer this kind of position?

Edited April 12, 2020 by Fazeel Rehman

[FlagshipShow + 3]

Didn’t mean to post that twice. I’m following this contango spread because I’m playing the calendar spreads on the two contracts. 
 

Alternatively you could wait until the 9th business day and short the spread by selling a JUN contract against your MAY long. “They” roll toward the end of the day. 

[Tomaz Korosec + 3]

Fazeel:

 

I checked your link and it does sound like there is no difference between rolling, but that does not sound logical to me at all. This way your broker will eat all the difference, which can sometimes be huge. How would they get this money back? This is total loss to them.. There is no way to escape oil contango. No one can do it, not even hedge funds. The only way to escape it is to BUY actual oil and store it. This is what many players are doing now. Leasing tankers, buying cheap spot oil, storing it for a few months and later they will sell it with huge profit because of contango.. But us normal players, no way to play oil other than futures or ETFs or ofcourse stocks.  I read a study which checked oil futures from 1990 to 2013 and they too found that rolling day can also have huge impact, like Flagship wrote above. Oil returned 70$ in that 23 years (in dolar terms not in % terms), because it went from 23$ to 93$. But this is spot return which you could not get if you did not store physical oil. The interesting part is that if you rolled 15 days prior to expiration, you made like 50$, if you rolled 5 days before expiry you made only 35$ and if you rolled on the day of the expiry you made 55$.. I forgot the exact numbers, but they prooved that first, there is no way of escaping rolling cost. And keep in mind that oil is rarely in contango, backwardation actually helps you. So those results would be far worse have we had contango like we had now all the time. And second they showed that rolling day can greatly affect your outcome. It is better to roll early, 15 days or to roll on the expiry date, but the worst result was if you rolled 5 days before expiry. And the difference was quite dramatic.

So again, there is no way your SP500 broker can just eat this cost, there is not way for them to hedge it away. The way I see it is maybe they will just deduct this rolling loss from your capital, but amount of oil or contracts will be the same.  Maybe this is what they are trying to say with this description above. I do not understand it completely, but the part where they say difference will be credited or deducted is the part that I think explains the rolling costs. Because they for sure cannot do anything else that we do when we buy contracts and if they are in steep contango then we must sell one for 20$ and buy next month for 24$ for example and the difference right now is even bigger, 6$!

 

[Tomaz Korosec + 3]

FlagshipShow:

 

thanks for your reply. This makes sense. Like I wrote to Fazeel above, I discovered a study where they proved that rolling day made huge impact on the result. That much that some years ago many people played Goldman roll or something like that. They knew when positions are rolled and the spread they do and they profited from that. I think it is the same trade you suggest so I guess it still works to this day. I was actually thinking of playing it the other way, when it was 4$ some days ago I was thinking it will surely narrow. Good think I did not execute it. I would loose 2$ on single spread already..

Too bad I removed one contract on thursday at the end of the day.. I still have 2, but I think not that the deal is made we will see a pop like you say. But not for long, because 10 mio cut will for sure not be enough, there is so huge demand destruction that I think price will hoover in 25-30 level for some time to come.. 

What do you think about BDO etf? I never played USO, but BDO does seem a lot less volatile and it tracks spot better because it optimizes contango/backwardation roll.. 

 

[Tomaz Korosec + 3]

6 hours ago, FlagshipShow said:

Alternatively you could wait until the 9th business day and short the spread by selling a JUN contract against your MAY long. “They” roll toward the end of the day. 

Sorry, can you elaborate on that? 9th bussiness day in each month? That would be on 14th of april this month due to friday being non-working day?

 

 

[FlagshipShow + 3]

Yeah. So people play those roll overs like you’re  saying. It’s a little easier during backwardation because the trend is a negative spread. It works on contango (fowardation) too though- it’s just more pronounced. Because the next month contract has less liquidity than the front it is easier to move up on massive buys. These institutional/fund rollovers mostly coincide on 5-9th business days. After the 9th (APR 14th in this case) there is a small window were this activity stops. That’s when the spreads will settle back to fair market value. 

Look at the spreads between JUN and JUL to interpolate. 
 

I think that USO is a good buy now. It has gotten destroyed by contango.It may go a little lower but not by much. I’m dollar cost averaging and selling $4-$5 puts.  

[FlagshipShow + 3]

So the play would/ could be to short the spread when you know that it should stop widening and start converging. So I would either sell the pop tonight and wait for a drop to jump back on Jun or ride it through the 14th and convert it to a debit calendar spread. 
If indexs tank on Monday it’ll pull CL down w it and vice versa. So strategies have to be always stay fluid. 
 

[FlagshipShow + 3]

Either way. JUN will stop getting propped up on the bulk of rollovers on the 14th. 
The only reason I mention playing the spread is to take advantage of it. You can close it out and go long JUN at anytime you see that it’s a better deal.  
I also don’t want to confuse anyone and recognize that selling on a pop and reentering on a drop is the easiest strategy. 
I use IBKR as well and the psychology of piece mealing a calendar spread on your own versus setting it up in the strategy builder can impede intended results. It’s just mentally harder to close out the red side...

 

[Tomaz Korosec + 3]

Yeah, I was thinking of going long DBO because it looses much less on contango. It is an optimized strategy which is always long a few contract months, but this also means when front month has a huge run up, it is left behind a lot. On the other hand check thursday.. USO down 7.18 %, DBO almost at 0... How it managed to stay unaffected is beyond me.  Even if they have a combination of other futures, it should be down at least a few %.. CLM20 went down 3.5% for example.. They must own december futures or so for that low % of negative closure. But if this is the case, then run up if it happens will also be dumpened..

A combination of USO/DBO would be ok if you time it right.. USO on huge run ups, then switch to DBO so if eventually sell-off happens you loose a lot less  

But for a long term holding I think I will go with DBO any without selling puts for now. Those put selling also costed me a lot of time. If underlaying goes down, perfect. You loose less. But if underlaying shoots up, you trail a lot by being short put, even ATM put, because your delta gets lower and lower. I made this mistake when oil rebounded from 20 to 29.. I was long 3x CL from 21-22 then sold them at 25-26 for a nice profit, but then to hedge I sold ATM puts.. Big mistake. It went to 29 and I would have cover all my loses if I just sold my long futures at 28, at 29 I would have made even a small profit.. But because I was "long" via short puts, the upside was very limited. Which is the reason I held those short puts and rode them down back to 23.. They were only 2 weeks out, but because CL went straight up they still kept a lot of premium.

So what I am trying to say is if you have a good strong conviction about the upside, you are much better of just going long. This way if underlaying reaches your target you get full profit and can then exit and re-enter again. With options you get less and less upside due to shrinking delta so when underlaying reaches your target it is as if you only had 1/2 or even less of starting deltas..  But then when CL tanks it is the other way around. You pick your deltas on your way down which makes loss bigger and bigger..  I think I got burned this way more than a few times. But I still sell options, because they give you some margin of safety and cozzy feeling. You can be wrong and still profit. Or price can jump up and down and end on the same level it started and you gain money due to theta decay. But I learned my lesson on CL never to sell options again on this underlaying. Or at least not when it is volatile like hell.  I will rather play it directly by being long CL or QM.. 

 

 

[FlagshipShow + 3]

yeah. I hedge w QM a lot too. Especially within a known range. I doubt the big gap gets filled this quarter and the smaller gaps are like mana from heaven on determining range...

I get what you’re saying w the options. IV is either your friend or your enemy. I think it jumped from 120-~200 during that scenario you just gave. 

[Tomaz Korosec + 3]

Yep, IV and gamma kills. Gamma specially on near expiration options. If you go further out in time then this delta change is not that dramatic. But being 1-2 weeks out if brutal.. You start with 2000 deltas then turn around and you have only 1000 if it goes up or suddenly 3000 if it tanks.. But my initial mistake was being short september 40 put, then this saudi/russia thing happend and I got killed. And had I just held this september put I would not even loose that much. But I moved to front month thinking I will make use of elevated IV which is more pronounced in front month. And I got in at 33 which I thought is insanely good level, only to see it fall down to 20 which I thought is next to impossible But sure it would bounce up sooner had it not been for COVID which at the time of all those trades was not a threat and only China had been in a lockdown at that time.. Just goes to show how "impossible" scenarios happen much more than one would expect. So now I would not be surprised if we see a 10$ oil before we see 40$ again.. 

[FlagshipShow + 3]

I got into a similar mess w NG before sub 2 was normal. Lost about $30k trying to salvage it. Made it back but scars are still fresh.
I’ve been looking to have a conversation w an options guy. I’ve been working on my weeklies “gamma sling shot” strategy. There is this window between day 5 and 3 of expiry where near the money can explode on a big move. Most of the premium is burned off and you can rock it if you’re pushed in. 
I’d sure like to perfect that and put it in an algo. 
or at the very least an alert. 

[FlagshipShow + 3]

But NG is where I learned to salvage trades, convert them into spreads and butterfly. 
As long as our losses make us smarter/ better, it’s just the price of tuition...

[FlagshipShow + 3]

USO roll dates. 
http://www.uscfinvestments.com/resources-filings/commodities/uso

[Tomaz Korosec + 3]

Thanks. I see I have a lot to learn if I am to trade this thing I only sold options before, first time I own outright futures and the biggest difference is that we were in backwardation most of the time or very small contango so this was not a thing to consider. Would never had thought there can be 6$ difference on the contract valued at 23$. This is like 30 % difference in front to back month which I think is extreme even for steep contango standards.. To loose 20% to contango in a year is a bummer, but to loose 30 % IN A MONTH?   

[FlagshipShow + 3]

You wouldn’t really lose it unless you were invested in a Derivative Fund.or you rolled over now or at the end. That’s why we join the boards- so we can help each other. I suggest selling on a pop and re entering when indexs tank on earnings and people digest the news. If tonight pops high enough it may trigger some short covering. It would be a great time to get out and see where it goes. 

[Tomaz Korosec + 3]

23 minutes ago, FlagshipShow said:

You wouldn’t really lose it unless you were invested in a Derivative Fund.or you rolled over now or at the end. 

What do you mean by that? Ok lets say I wait for a few more days before rolling. I have only this coming week to do it and there is no guarantee spread will narrow. It can, but there is also a possibility it stays 5$ wide until the end, or? I am not sure, this is actually what I am trying to find out. If I wait until last trading day and roll to the contract on the last or one day before last trading day, how much spread there can be between front and back month. I think in previous roll from march to april there was like 2$ difference on the last trading day. Still much better than 6$.. But a day before that I think there was almost no difference.  But this was also before all this lockdown and before all those big meetings.. I plan to sell tomorrow on POP if it is big enough anyway.. For a few weeks now I was waiting until 24.00 when markets open, but then I found out that this early open action can also be fake.. Sometimes it pays to wait for later.. For example in many cases now it opened waaay low only to climb back up in next few hours. I am from EU btw.. So then I went to sleep expecting even more carnage at 8.00 in the morning when I wake up, only to find CL almost in green.. So now I will just pre-set orders and go to bed, not to be shaken out with a loss in 1 hour when markets open only to find out I could have exit a few hours later at much better price  

What hours do you trade? Do you wait for opening bell which will be in 1 hour, or wait for more volume on regular trading hours? 

[FlagshipShow + 3]

Sorry. Got caught up w family then traded late. They need to include this in their app. It’s not easy to log in on your phone like this. 
 

I hope you sold on the two pops. They decimated the front end today and spreads are almost 7! It’ll take all night and tomorrow for it to sort itself out....

[FlagshipShow + 3]

If you sell on a pop and get back in on a dip you don’t have to worry about all that. This extreme contango is temporary. Your not gonna miss a few bucks by not being in the game for a day. If it soothes your mind, buy a call to fill in the gap.