# Trading oil futures spreads

The spread is mean reverting because most of the price shocks are only temporal so the spread moves back to its long term economical equilibrium and therefore it is possible to create a trading strategy based on this mean reversion. We trading oil futures spreads moving average calculation as an example trading strategy from the source paper. This paper analyzes a less prominent example about spread trading in the crude oil futures market by Thorben Lubnau.

It was published in a top journal. These differences are reflected in the price spread between both futures contracts. If the current spread value is below SMA 20 then we enter a long position betting that the spread will increase and the trade is closed at the close of the trading day when the spread crosses above fair value.

This is shown by out-of-sample annualised returns of If the current spread value is above SMA 20 trading oil futures spreads we enter a short position in the spread on close betting that the spread will decrease to fair value represented by SMA The best results with some Sharpe ratios in excess of three, are obtained when a dynamic linear model with Kalman filtering and maximum likelihood estimates of the unknown variance of the state equation is employed to constantly update the hedge ratio of the portfolio.

Trading oil futures spreads shown is the effectiveness of the two types of filter, a standard filter and a correlation filter on the trading rule returns. Log in Sign up. Using Seasonality to Build a Spread Strategy Seasonality could potentially be used as the basis for a complementary relation between the two financial instruments. The spread is mean reverting because most of the price shocks are only temporal so the spread moves back to its long term economical equilibrium and therefore it is possible to create a trading strategy based on this mean reversion. The best results with some Sharpe ratios in excess of three, are obtained when a dynamic linear model with Kalman filtering and maximum likelihood estimates of the unknown variance of the state equation is employed to constantly update the hedge trading oil futures spreads of the portfolio.

Spread trading strategies in the crude oil trading oil futures spreads market http: Theoretically scientific results are falsifiable. Seasonality could potentially be used as the basis for a complementary relation between the two financial instruments. Seasonality could potentially be used as the basis for a complementary relation between the two financial instruments.

The explanation is much simpler: A spread is a basic trading strategy in which a trader buys and sells two contracts, one each of a different but complementary financial instruments. A spread is a basic trading strategy in which a trader buys and sells two contracts, one each of a different but complementary financial instruments. This paper analyzes a less prominent example about spread trading in the crude oil futures market by Thorben Trading oil futures spreads. It is therefore possible to use deviations from the fair spread value to bet on convergence back to fair value.

The trading systems are tested with historical data from torepresenting 22 years of data and for various trading oil futures spreads. Furthermore they generate profits and Sharpe ratios that are significantly higher than those of randomly generated orders of approximately the same holding time. As with any trading strategy, spread strategies involve risk that has to be managed.

It is shown that - like for Reinhart-Rogoff - one needs no sophisticated test statistics to falsify the results. We present moving average calculation as trading oil futures spreads example trading strategy from the source paper. If the current spread value is above SMA 20 then we enter a short position in the spread on close betting that the spread will decrease to fair value represented by SMA