When chatting with friends in the WeChat group, sometimes we often hear questions like this: “Why did the price of crude oil rise today? Why did there be good news today, but crude oil did not rise? There was bad news, but crude oil did not fall?” And so on.
The intraday price changes of any commodity are unreasonable most of the time. The intraday price changes of WTI crude oil are no exception. Most of the market commentary published by the media is generally “hindsight”. Because market comments are published after the market ends, they are not very helpful to the market transactions of the day.
So, for us traders, the most important issue now is to have enough information “in advance”, that is, before the market starts, and to be fully mentally prepared for possible changes in the market that day.
Market liquidity determines the intraday price changes of WTI crude oil
Personal observation is that there are basically the following four main factors that affect intraday price changes in the WTI crude oil market:
First, major time-sensitive fundamental information, such as the monthly reports released by the U.S. Energy Administration (EIA), the International Energy Agency (IEA), and the Petroleum Exporting Countries (OPEC), or the American Petroleum Institute (API), Weekly crude oil inventory data released by the U.S. Energy Administration (EIA) and more.
Second, WTI crude oil futures is part of the entire Chicago Mercantile Exchange (CME) energy portfolio, and its daily intraday price changes will be affected by price changes in other energy products, such as gasoline (RB) and diesel (HO) daily price changes. In the past year or so, as diesel inventories have been falling sharply, well below the five-year moving average, the market demand for spot diesel has caused the price difference between diesel and crude oil to rise sharply (please see Figure 1 ). As shown in the figure, in the past two weeks, the price difference between December diesel and crude oil futures has risen from a low of $42 to $59. This means that consumers have to pay an extra $17 to purchase a barrel of diesel. The daily price movement in the diesel market affects the price movement of WTI crude oil. This is what I often mentioned in my lectures in the past that we must seize the price movement leader in the energy market.
Figure 1: Price difference trend between diesel and crude oil
Third, according to CFTC data, high-frequency (HFT) and quantitative trading have accounted for more than 60% of the daily trading volume of WTI crude oil. High-frequency (HFT) and quantitative trading cannot change the general direction of the crude oil market, but these transactions The strategy has sufficient market trading volume and has sufficient influence on the direction of intraday WTI crude oil price changes.
Fourth, the imbalance of liquidity. The WTI crude oil market has sufficient depth and breadth, and various institutions are making full use of this derivatives market to protect themselves or make profits. For example, the shale oil industry continues to sell forward WTI crude oil futures to hedge its own production capacity, resulting in a discount of forward WTI crude oil futures to near-term futures.
The WTI crude oil futures trading direction during the day is wrong. Do I need to stop the loss?
It can be said that the intraday trading price changes of WTI crude oil are basically completely determined by the market liquidity of the day.
In this case, then we are faced with a question: If the direction of intraday futures trading is wrong, do we need to stop the loss? How to stop losses?
Please look at the daily chart of WTI crude oil October futures in Figure 2. It can be seen that the transactions of each day are almost a repeat of the previous day, but in different directions.
Figure 2: Daily chart of WTI crude oil October futures
In such a market, if the loss is stopped every day, the loss will be huge. Is there a better way to solve this problem?
Buying short-term options on WTI crude oil, that is, weekly options (LO1, 2, 3, 4, 5), may be one of the ways to stop losses in advance.
The CME Group’s crude oil (CL) and refined oil derivatives markets are the largest crude oil derivatives markets in the world. The CME Group crude oil options market is mainly divided into two parts. The first is crude oil standard options, and the second is crude oil ultra-short-term options, namely weekly options.
What the above two options have in common is that: one is an American option, and the other is a spot delivery and settled into a WTI crude oil futures contract. The difference between standard options and weekly options is that the expiration date of standard options is three days before the expiration of the corresponding futures, while the expiration date of weekly options is every Friday (LO 1-5).
So what’s the benefit when it comes to weekly options? The biggest advantage is that the time is short, so the insurance premium is relatively cheap. WTI crude oil ultra-short-term options, namely weekly options, can effectively and flexibly manage short-term market fluctuations and risks without increasing insurance premiums.
As mentioned before, the most important thing for us as traders is to be fully prepared for possible changes in the market that day. Therefore, by using crude oil derivatives flexibly, we can protect ourselves and even make profits.
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