1/THREAD: MARGIN-INDUCED $CL TIMESPREAD RALLY
CME Group raised energy margins across the board, but increases are disproportionately larger on % basis on CL timestread margins than on outright margins.
My hypothesis on flat price and timespread rally last 36 hrs is that...
CME Group raised energy margins across the board, but increases are disproportionately larger on % basis on CL timestread margins than on outright margins.
My hypothesis on flat price and timespread rally last 36 hrs is that...
2/ two things are happening simultaneously.
First, we're getting a bounce in everything as increased margin requirements force both outright shorts and timespread shorts (a VERY crowded trade) to lighten up short positions in order to meet increased margin requirements.
First, we're getting a bounce in everything as increased margin requirements force both outright shorts and timespread shorts (a VERY crowded trade) to lighten up short positions in order to meet increased margin requirements.
3/ Second, and less obviously, I believe holders of short timespreads are re-evaluating their strategy. They see short timespreads as the better "pure play" on storage expectations, but outright shorts are a decent proxy and now suddenly the margin requirement is considerably
4/ lower on outrights, enabling a less efficient expression of the same trade with higher leverage per unit margin exposure.
I suspect today will see some turbulence and by Monday everyone will adjust their books to express that they think is the most efficient short exposure.
I suspect today will see some turbulence and by Monday everyone will adjust their books to express that they think is the most efficient short exposure.
6/ I welcome feedback @phemsworth @Big_Orrin @RobertM14545180 from anyone with insight into institutional flows as to how the market is processing this margin hike, which was disproportionately hard on CL timespreads vs. outrights. Thanks!
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