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Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
Thanks Given: 4,386
Thanks Received: 10,206
Next day (4th) I added to the positions at better prices (-40.375, +13.67 & +18). This is very typical for me on a mean reversion trade, to layer into a position. As the position gets close to my desired size I also trade a around the position a little. Taking a little off as it moves into the money allows me to reestablish the position if it moves back out again. Looking at the price action though I became concerned that these butterflys seemed to move directionally with the market direction. This would mean that the butterfly trade is dependent upon the market, or spreads moving in the right direction, and not necessarily reversion to the mean.
Due to my concerns, and as I did more analysis I tried to exit some of the position yesterday (5th). At one point prices were close to my original entry levels, so I had a small profit in the position but my execution wasn't quick/aggressive enough and the market moved back away.
Last night I completed my additional analysis and confirmed my fears that this trade is more directional than I would like and not a great mean reversion candidate. (Analysis in a minute). This morning I exited the position. I am a strong believer that if your thesis for a trade is violated then you should immediately get out and reassess whatever the PnL. Staying in a trade you don't want to be in, purely to avoid taking a loss is a disaster waiting to happen. On the XFHK Double Fly I incurred a loss of just over 2c/unit. With the FHKN Double Fly I had a small profit of just over 0.5c, and finally the FHK fly had a small loss of just over 0.5c. All in all an average loss of almost exactly 1c per structure vs original average profit target of 8.5c each. Nobody likes losing money but this is pretty insignificant and I'll chalk it up to some cheap education!
So let me explain further why I reversed course so abruptly.
Below is a chart of the Crude Oil XFHK Double Butterfly (ie +1 X, -3 F, +3 H, -1 K) on the X-axis plotted versus the Crude Oil X-K spread on the Y-axis. As you can see this is a very noisy chart, with no obvious pattern. While different years have different price levels, there is little correlation between the price of the double fly and the spread. (For what its worth I do not trade this Crude Fly, I just used it as an example as it is the same structure as the Soybean trade.) The Black Dots are this years data.
Now lets look at the exact same chart, but for Soybeans. There is now a clear relationship between the two. The higher the spread goes, the lower the Double Butterfly goes.
The reason there are more 2021 data points for the crude chart vs the soybean chart is because crude expires 2.5 weeks earlier. CLX1 is currently about 120 trading days from expiry while ZSX1 is about 137 days away.
Amen. Did the same thing two days ago on a bond trade and prevented a small loss from becoming a stupid loss. Also learned something new as I revisited my data.
Thanks for sharing your thought process on this. As someone who rarely trades spreads and has never traded a fly I really appreciate these practical nuggets.
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
Thanks Given: 4,386
Thanks Received: 10,206
Oil demand is changing the dynamics of the soybean trade
As the energy market transitions to less fossil fuel-based products, biofuels and hydrogenated vegetable oil (HVO) are becoming part of the solution – increasing the importance of hedging key feedstocks, such as soybean oil, in the biofuels sector.
The white paper, "Global Feedback Volatility Intensifies for Biofuels," written by CME Group Researchers Paul Wightman and Fred Seamon, examines the factors impacting heightened demand for soybean oil and the benefits of hedging an increasingly volatile commodity.
A crack in a bridge over the Mississippi River has stranded more than 700 barges, cutting off the biggest route for U.S. agricultural exports when the critical waterway is at its busiest
The New Orleans Port Region moved 47% of waterborne agricultural exports in 2017
First i want to say i think this trade was more lucky than anything else.. since it turned out to be more directional than expected. The idea was mean reversion but as was pointed. The margin on each doublefly should have been around $935 (so total margin should be around $1870 for 2 Qty) but in IB it is way way higher than that.
The doublefly was the ZS XFHK as you will see but initiated as separate flys and averaged in
The net profit before commissions shows as $772 which would have been good had the margin been SPAM
Note: i should point out that the hold time was about 2 weeks
With regard to the above-mentioned spread, it is interesting to note that the WN21-WN22 notes at approx. 13, whereas the WN22-WN23, which will not be in the ground until fall, notes at approx. 47.
Thanks I’m wondering if N22/23 is so over valued whether u can create a fly/double fly with this as the center to try eliminate directionality but since it’s a 12 month spread the other side would N24.. I will check this weekend
I would be interested to learn about your findings, but I doubt that it is possible to trade these flies.
The problem is that the WN24 is not yet traded. CME states for the Chicago wheat contract: "15 monthly contracts of Mar, May, Jul, Sep, Dec listed annually following the termination of trading in the July contract of the current year." I assume that the terminus "year" means the crop year. Thus, the latest July contract available would be the 2023. This is confirmed by IB offering the WN23 as the latest July contract, and showing data for the WN23 contract since August 2020.
Even for the WN23 contract volume is very thin. According to Interactive Brokers, there was only one week (!) since August 2020 with more than 10 contracts traded. Bid / ask spread is significantly larger than for the WN2022.
Just a note to add: the disjoint between the July wheat contracts for 22 and 23, ie trading old crop vs new crop is priced at those levels because of the tight supply in grains at the moment. It's pretty low across the board. It's more of a directional trade betting wheat supply will increase and prices will fall, so I don't think comparing it to the last however many years is too useful, imo would have to analyse wheat supply to make that trade. Just my two cents.
