Pricing oil calendar spread
I am looking at the oil futures calendar spread market. What is my best way to infer information about it from the markets on the outright futures? Consider the fact that the outright markets are much thinner, more volatile and often gapped(the back future outright market is gapped several tens of ticks). Thanks
Are you talking about the contangos and backwardations a few months out?
Typically, the direction of the contango/backwardation defines the trend. A widening contango or a narrowing backwardation indicates a bearish market. A narrowing contango or widening backwardation indicates a bullish market. Some commodities will have funky curves sometimes but overall the oil markets are pretty liquid and the far-dated futures usually do provide some insightful market information.
Really depends how far out your looking. If your looking at calendar strips on WTI you can compare this to Brent and see where the mkt currently views this spread converging(2016 last i checked). You can infer when structure is coming to WTI. Right now most spreads are trading as if the mkt is not incentivizing storing WTI.
In terms of liquidity one month crude spreads (CLZ1CLF2) are very liquid. Even spreads within a year are pretty liquid(compared to other energy prods). Crude also has a significant calendar spread option mkt. Depending how far your going out might be benefical looking for a CSO mkt.
Yeah, I want to price CLZ1CLF2 off of CLZ1 and CLF2 for intraday trading purposes.
what do you mean by price? Are you referring to an option or the spread? Crude spreads have seperate contracts. If you have a bloomberg type in CLZ1CLF2 Comdty MDM(mkt depth monitor) GO. you'll see huge trading volume compared to just CLZ1.
I mean deciding if it is underpriced or overpriced based on how the outrights are trading. In a quant model.
Go to global-derivatives.com You can find a spread option model there. Basically just need two volatilities and a correlation to calc it.
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