Looking at LS Crude Oil and its opportunities with calendar spreads

Introduction

As you know, the oil futures are on the move. Everything indicates that the LS Crude oil is heading to 80 according to Goldman Sachs and JP Morgan. I believe that it’s possible to reach 80 before 2019 considering the current price and its momentum. It´s an 11% upside from the current price. The LS Crude Oil Oct18 started the year at 58.58$ and yesterday, it closed at 72.27$.

LS Crude Oil Oct18

    LS Crude Oil Nov 18, daily, source: TradingView

This is the perfect chart to explain how this commodity has performed this year. It represents 24.39% up in the year. After the last OPEC meeting seems that has more upside potential because they didn’t agree on any increase in the oil production.

The Spreads

    LS Crude Oil Dec18-Jan19 Spread, daily, source: TradingView

Probably this is the best spread for new traders or even for experienced traders because they will have a lot of opportunities with limited risk. The spread has been ranging between 0 and 0.80 the most part of the time.  You can see that each time that it opened above this level was a clear sell signal.

   LS Crude Oil Dec18-Mar19 spread, daily, source: TradingView

We can see a bigger range in the 3-month spread as it was expected. I´ve never been involved with energy products but looking at the chart. I would consider buying below 0.60 and selling above 1.80. This is an easy conclusion, however, trading this spread is not that simple.  

     LS Crude Oil Dec18-Jun19 spread, daily, source: TradingView

To be honest, this spread seems an outright. When the front contract falls, the spread falls really aggressively at least in the first 7 months of the year. Both outrights have been converging in the last 2 month.

Conclusion

As I said, I haven´t been involved with energy products and this is why this post is not as big as the other ones. It´s a great product and there are so many ways of trading it. I think the Oct contract will keep going up. I’m not sure about the movement of the spreads because the back of the curve is converging with the front (as we saw in the 3-month and 6-month spread). Probably the producers are buying futures because they expect higher prices of this commodity in the future. I hope you like.

Have a good trading!!

DBK Trading System

Deutsche Bank is one of the biggest banks in Europe by total assets. During the last years, it has been struggling to adapt to the new low-interest rate environment.The losses from the financial crisis were very big. In addition, the big provision for fines and lawsuits drove its profitability to the negative side. Therefore, its shares have been dropping these years. In response to these problems, John Cryan, Deutsche Bank CEO, decided to implement a restructuring plan some years ago. 

    Source: TradingView, Deutsche Bank shares, daily

Even with the above, I believe that this bank offers value from a trader or investor’s perspective. Analyzing this bank is not the purpose of these post.  

Trading System Intro

I consider Deutsche Bank as one of the most important banks around the world and I believe it will be a reference in the coming years after resolving its problems. This is why I created a short-term trading system to buy the weakness of the stock. The system is based on risk management, the maximum risk taken per trade is 1% while the take profit is set at 10%. With these numbers in mind, we can expect a lower rate of successful trades.

Backtesting from the 30/10/2013 to 17/11/2017

Let’s see the theoretical behaviour of the system

     Statistics of the DBKT trading system, own elaboration using R Programming

The system makes 84.20 EUR per trade on average which is 0.8420 EUR per share considering that it trades 100 shares each time.  The distribution of returns is not as good as I would like it but I expected this problem before I tested the system. The biggest profit was 2290.05 EUR. The worst trade lost 478 EUR. It would have made 5304.77 EUR profit which is the equivalent to 26.52%. It’s a modest return but as we will see later it’s adjusted by risk. The Sharpe Ratio is good.

       Return’s distribution, own elaboration

Sadly some of the returns were worse than the max loss of 1%. This was due to the gaps in the opening. There are ways to solve this problem but it’s interesting to see this kind of problems in order to avoid miscalculations in the future. 

     Max drawdown and performance of the system, own elaboration

As you can see the worst loss was 2773.79 EUR which was the equivalent of a 12% loss for the portfolio.  However, the rise of following days offset the loss and drove the system to profitability. After that, the system was steady without important changes.

      Portfolio evolution, own elaboration

To sum up

We have seen a simple trading system applied in DBK equity. I would like to remind that analyzing this company wasn´t part of this post. I've chosen this security for its volatility. This system hasn´t been improved and it had some problems addressed above. The performance is good considering the 12% max drawdown. I've played with different portfolio sizes before publishing this post but I thought that the 20000 EUR portfolio was the best in terms of risk-reward. A 10k EUR portfolio would have returned 40% profit with 23% max drawdown but I prefer smaller drawdowns. 

I hope you like it.

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved