Crude Oil & Gold

Crude Oil & Gold

THE TRICKS OF THE TRAD'ING

Something quite interesting is happening in the Oil (/CL) and Gold (/GC) futures markets that frankly we believe is only visible using the Masters in Trading Edge Tools. I haven't been able to think of a comparable way to view markets, heard of anyone else's way of doing something similar, nor seen any commercial products that offer what Edge does. What you're about to hear comes from using the Edge tools since their inception in early 2018. This is how we have traded futures since, with the help of Edge.

LET'S GET STARTED

Using Metals Edge, we configure the chart as follows

  • 5YR of data, using 1D bars.
  • Replace the /SI symbol for /CL in the study.
  • Disable all plots except for /GC and /SI (which is really /CL)

While scanning the market as we normally do, something that popped out was how /CL was touching /GC's upper implied range bands on a yearly cycle. These commodities have shown to respect each other's yearly implied move since data has been available – around 2008.

TRADE IDEA

Purchasing ANY sort of option on /CL, preferably in the SEP 2021 or DEC 2021 contract, would allow you to gain from the explosion of volatility such events have triggered in the past.

Another way to harness this market is by buying /GC and selling /CL. While doing this using futures is one way to do the pair, this can be accomplished in a risk defined manner using the options on futures.

Options on Futures

For example, the /CL DEC 2021 59 puts vs

the /GC DEC 2021 1990 calls. 1 to 1.

Each leg is currently trading for around $1,650.00 [on /CL this would mean $1.65, on /GC this would mean $16.50] thus the max risk on this trade on net would be $3,300.00 per spread – but it would provide 135+ days (from today till expiration), and greatly benefit from the Vega component should a spike in volatility take place on either market.

Alternatively, one may opt for something with less time – the SEP 2021 contracts, where we can BUY the $60 put and $1915 call for around $1250.00 – the /CL 63 put for $600 [$0.60], and the /CL 1900 call for $650 [$6.5]. In either case, unlike with future contracts, this is the max loss possible from this trade. With future contracts we mitigate risk, but we don't completely define it as we can with options.

Thankfully both of these commodities have liquid option markets, unlike several other futures.

FINAL THOUGHTS

GIVEN THE DIFFERENT TYPES OF MARKETS (ENERGY VS METALS – NYMEX VS COMEX), THE EXPIRATION DATES ON THE FUTURES ARE NOT PERFECTLY ALIGNED. THUS THERE IS AN 11 DAY DIFFERENCE IN THE EXPIRATION DATES BETWEEN THE /GC AND /CL FUTURES (AND OPTIONS ON THE FUTURES). /GC OPTIONS EXPIRE 11 DAYS AFTER THE /CL ONES DO. FOR THIS REASON, OUR PREFERENCE IS TO USE THE LONGER DATED DEC 2021 OPTIONS, AND LIKEWISE ENSURING WE ARE EITHER OUT OF THE TRADE OR “ROLLING OVER” OPTIONS WITH AMPLE TIME BEFORE EXPIRATION SHOULD THE NEED ARISE.

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