The Brent v. WTI spread has blasted out again on US production, Iran, etc....
It's hot money that moves this spread around (my opinion).
The fundamental story is wonderful, but the WTI has a lower sulfur content which makes it easier to refine than Brent and generally more valuable, but the market right now disagrees and that's all that matters.
Picking the tick on the futures spread is dangerous business and not for the faint of heart. If you're right and negotiations with Iran make some progress.....WTI should outperform Brent at some point before long.
That's one approach.
Alternatively, I could consider options strategies that look for the spread to narrow over the next 3 months. I'm looking at March options in Brent and WTI that expire in the middle of February. WTI options expire on Feb 14th Brent options expire on Feb 10th Consider:
- BUYING the WTI 105 call around 48 cents verses.....
- SELLING the BRENT 122 call for 48 cents (EVEN MONEY on the options).
- You're synthetically short the spread at $17 wide but not as "futures sensitive".
The March Brent v. WTI spread is 14.80 wide as I type.
In Spring of 2011 (Arab Spring = FEAR and inflation) as well as early 2012 (Iran) Brent traded up near $125. (At the same time WTI ~$115).
There is CONSIDERABLE risk in ANY OPTIONS SPREAD. Perhaps Brent v. WTI goes back to $20-$25+ wide. I doubt it, but it's possible.
We can discuss various alternatives if this is of interest. Perhaps it makes sense to wait a couple days, but I believe we're VERY close to a potential pivot. If the front month spread (now at $16.20 wide) gets out to $17.50-$19.00 wide again I would consider short term scalping futures (short Brent. long WTI).
At one point in mid July of this year the spread (front month) literally went RIGHT TO 0.00 (EVEN) and then reversed in perfectly algorithmic insanity.
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