Inversion Reversion: A Spread Trade in Crude Oil (WTIC vs. Brent)

the balck bkg image is (DEC10 - JUN 10 ) CL spread as of 5/3/2010 , notice it shows wide range of $1 with in a day. so when JUN is high BUY of this spread is good idea , as JUN will drop while DEC10 maintain same level or little drop, giving the Net of spread close to $1

b) this way we can avoid having options , the Far LONG contract act as option if JUN goes high from our ENTRY position .

http://www.quantdynamics.com/?p=1567

Current pricing of crude oil (a/o 2/11/09)

Historical Chart of the spread between WTI and COIL

As we can see, the spread percentage is currently around -15 to -20% and market instability and noise has significantly distorted the historical spread. This spread is tradeable on both directions. Anticipating a market dislocation tells us to short WTI and buy COIL. If we want to trade with a reversionary interest (the current situation) then we would long WTI and short COIL. In the latter case, we expect the -20% market discount of WTIC compared to Brent crude to normalize to the historical norm of +7% premium.

-----------------

Since then, the inverted WTI prices have rebounded completely to a premium versus the Brent counterpart! Here is a chart showing the evolving mean reversion:

As you can see in the trade summary the capture of the 5-day reversion yielded a net +$1,360. Today, the reversion continued through to a premium on WTI:COIL. Here is the reading on Crude prices for the front three months on Friday, March 06, 2009:

-----------------------