So this is for traders who've actually traded in the TAS market or have traded swaps or familiar with it.
"On April 20, as Bank of China and others were selling May contracts, Vega’s traders were hoovering them up in the TAS market, according to people familiar with the matter, agreeing to buy oil at whatever the settlement price turned out to be. Then, as the settlement time approached, they aggressively sold outright WTI contracts and other related instruments, contributing to the downward pressure on the price. Vega stood to profit if it managed to buy oil through the TAS market more cheaply than the oil it sold through the day."
So what I'm getting at is, on April 20th of 2020 which was settlement day, market participants like the Bank of China and ETF managed funds were rolling their contracts by selling on the TAS market. Vega Capital were buying up these contracts at settlement then when the day when oil when negative, they were selling aggressively to pushdown the market. This doesn't make any sense because they would have lost money.
I can't find this anywhere online but my assumption is, they were long CL futures and when oil was going negative, they did a look-alike swap or did some VWAP algo selling the CL and buying up the CS? I don't know. I could be severely wrong. Any oil traders care to explain? I'm a NatGas trader and trying to dabble into crude.
Ah nvm, I figured it out. They were essentially banging the close. Lol. What they did was EXTREMELY risky. They were aggressively selling towards settlement causing a frantic then they loaded up on TAS that same day. This is insanely ballsy. I assume they were initially taking a huge loss on these long CL futures they were holding and telling their clearing firm to calm the fuck down.
Let's see what could go wrong?
- Liquidity dries up.
- Nothing on TAS market during settlement time
- If TAS works out, crude settles even higher with some enormous buyer coming into the market (Unlikely given they started selling close to settlement time)
I did some calculation. Rumor they bought contracts at $18 give or take and when the crude settled $-37.
The difference is $19. That means for one dollar, that's hundred ticks. $19 x $10 per tick x 100 ticks = 19,000 profit for one futures contract.
$500m profit assumingly.
$500m divided by $19,000 profit = ~26,315 outrights they were long... That's fucking insane. They must have a shit ton of capital.
Remember again, this is a purely financial firm I believe they have capital but do not have that much capital. Very likely they owned a series of “option ladder structures” which became active delta during settlement week typically you roll your ladders to take profit and not tie up capital to manage the futures. Needs capital but not that much capital.
Typically commodities are euro options remember so trading euro options on futures easily get that leverage.
Difference is $53.00, no?
If you trade natty, this happens everyday and month my friend like natty traders should know this better than crude.
TAS is not holding an outright position till final settlement think you figured that out by now. If TAS gets totally offside a physical player can run you over (as the market is setup that way). If any producer said they plan to shut off prod below $30 they could have come in at TAS window and ripped it. But reality is most midstream companies have super full storage and no matter what planned to sell at TAS if they saw a storage arb still ($-37 aint no arb) traders at vega clearly knew this and setup very long TAS (meaning they would be buying at the window for size). Through the day they acted like the market found a floor and picked up id assume 20% length of that position then when window opened dumped all that length as they had more bullets than anyone. Making others follow suit. TAS gets them out at settle price.
As you sort of alluded the major risk was how much of a position they had a week before settle day as for all this play out would need to manage flows entire week to make sure can manage your TAS last day properly.
Do not think its as ballsy as you think, its taking on a ton of regulator risk (which clearly they dealing with now). Many merchant with actual physical storage did the same without blatantly showing their hand I believe.
Well, it sounds like they bought a shit ton of the front contracts during TAS and held onto a for while. So my question is, if they sold all of the contracts during that 30-minute settlement window and were pushing down the market and let's say, i don't know, bought a shit of contracts at TAS when crude was negative. I'm gonna assume they bought a shit ton of financially settled contract at TAS, assuming the crude financial crude also has TAS and made a killing. What I don't understand is that they were obviously losing money selling those futures contracts to push the market down. It must have been an insane amount. If the contract didn't settle low enough to compensate for that negative PnL from the contracts that they sold, they would have lost a lot of money, right?
Truly I never looked into that depth. But from what I read as you said classic banging the close. I will try to give my idea of how such a strategy works.
Basically 3-5 weeks before settle they must have identified the price risk crash is either in May or June. At that time they must have started to load up put ladders from $40; 40/30/20/10/0 I do remember someone quoting and buying $0 puts. So now we have a massive options OI and delta management. The options guys would fight to death to make sure $30 does not cross on options settle (can’t remember if it did), again creating more risk to a wild final settle day. There are instruments that lets you shift your whole options delta to become LD delta, so you do that. So now you are setup very short LD delta with money in bank already. During the same time you setup to have your entire LD delta closed at TAS.
Now settle day starts in the morning you start to close your delta short by buying FP length, as mentioned could be even 20% of your entire delta. When 30min window starts you dump that 20% in coordination to move down the price, so as you mentioned that 20% you lose on daily trades but its a fraction of the overall position. Truly you may not even lose that much, cause when during the day you bid the market towards $18 others may have thought we have a floor and settle is gonna rip to $30. So maybe you dump 10% at $22 when settle starts then lure more length in and then just go offered all way to $10 and then just make a 2way all the rest of the settlement window. Things can get awry that fast during settlement.
If they were trading WTI CME TAS contracts they settle into futures each day at the daily settlement price (VWAP from 2:28-2:30) this all happened on April 20th the day before last trading day of the May contract April 21st anyways.
Well yeah, unless it's spreads.
What are you guys talking about? They sold a bunch of futures, and then bought TAS to close their position at the end of day settlement price. from an article I read they started shorting around a price of $10, and closed their position at settlement at -37 so they made 47k per contract
Not sure what’s confusing as this is very straightforward. nothing to do with “ladder options”
I thought so. These guys sound like your normal cowboys in a futures arcade shop. Lol. I don't think their putting on any complex trades. I guess my assumption is that the only risk in their strategy was if the contract didn't settle low enough, they would have lost a lot of money, there was no liquidity in TAS or there were no bids as they were pushing down the market.
This is where you guys underestimate how sophisticated “cowboys” are. They do not need to trade vol surfaces year round like a pod shop to know how to put on massive leverage into a settle month. To each their own.
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