The famous WTI/Brent spread strategy...never tried it..in theory should work http://www.quantpedia.com/Screener/Details/100 http://econstor.eu/bitstream/10419/9.../783913591.pdf ...
Oil Hedging strategy this is very simple strategy place a buy on WTI and sell on BRENT and target 10$ for each cycle here is an example: {image}
Yeah Hedging Strategy could work as WTI Volatility is High
I think a mean reversion strategy would work well here. Here's the pair with standard deviation channels drawn: {image} A good strategy might work like this: Buy at lower 2nd St Dev (green line) Short at upper 2nd St Dev (red line) Take Profit at mean (white dashed line) Stop Loss at either 3rd St Dev (pink line)
I've made some research and I have found that this is anticipating if the spread will widen or not, in other word, it's trading, simply, like anticipating wti movement. Some broker gives contract on wti brent spread. So I think that it's better to talk about the reason why the spread changed, instead of trying to demonstrate that this hedging works. It have worked because the spread goes down for the last month, but it isn't always the case. Have a look on this if you want more: http://www.investopedia.com/articles...-and-dubai.asp...
{quote} Hi, Thanks for that! Can you explain this a little bit more, please? Is this standard deviation channel drawn only on Crude oil? Or on both pairs? If yes, how is it possible to combine those two pairs in one Chart? Thank you!
For example, let's say WTI is currently at 55 and Brent is at 60. In this case, you'd have a spread of -5 (the average) and there would be no opportunity. Time goes by and now WTI is at 56 and Brent is at 62 making for a spread of -6. You think the spread will return to -5 so you go long WTI and short Brent. The next day WTI goes up to 60 and Brent goes up 65 so the spread has gone to -5 and you close both sides of the trade. You made $4 on WTI and lost $3 on Brent so your net profit is $1.
Now here's where things get complicated. If we know the average spread is -5, does that mean we should execute the trade above when the spread reaches -6? What if it goes to -10? If that happens we would have risked $4 to make $1, not very smart. How do you know when is the right time to buy and sell? This is where statistics comes in. This chart shows a standard deviation channel which is a default Thinkorswim indicator:
{quote} Sure, I'd be happy to explain further. This is a textbook mean reversion trade so I'll explain the basics of that first, then get into the more complicated aspects. This is a chart of WTI-Brent (CL - BZ futures contracts): {image} Since Brent is worth more than WTI, WTI-Brent produces a negative spread as shown above. If the average spread is -5, you'd execute trades like this: If WTI - Brent < -5, then long WTI and short Brent. When WTI - Brent = -5 again, close both sides of the trade. If WTI - Brent > -5, then long Brent and short WTI....
