Thinkorswim Trade Tool: High Value Targeting For Crack Spread

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Thinkorswim Oil trade
What is the Crack Spread?
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First off, what is the crack spread? The crack spread is a simple yet powerful trading tool that measures the pricing difference between a barrel of crude oil and the petroleum products refined from it, such as gasoline and diesel fuel.

When refining margins increase, traders look to take advantage of this signal with an increased appetite for energy stocks and commodities. This increase in refining margins is an excellent way to gauge the success of oil-related products and services, indicating where money is in the refining process, and allowing traders to follow these market dynamics to find great trades.

The most basic Crack Spread is the 1:1 Crack spread. This is where profit is made by exploiting the price difference between crude oil and refined products like gasoline or diesel. They do this by purchasing crude oil futures while selling refined product futures, effectively locking in the spot price of the finished product. When the price of refined products exceeds the price of crude oil, this trading strategy generates a positive gain.

Another common crack spread used by traders is the 3-2-1 crack spread. It involves three crude oil futures contracts, two gasoline futures contracts, and one ultra-low sulfur diesel (ULSD diesel) future contract. Professional traders use diversified crack spreads as part of their directional trading strategies to create a balanced portfolio. Taking these diversified options strategies into account can help traders in creating a blueprint for making better-informed decisions and mitigating risks within their portfolios.

Why is the Crack Spread Important?

The WTI crude oil price and its principal refined products have always been unpredictable and immensely volatile, as these prices are influenced by various aspects related to supply, demand, production economics, and government regulations.

When the prices of crude oil increase but the prices of oil refiners stay constant or even drop, it results in a narrow crack spread that poses a tremendous risk to refiners and non-integrated marketers who are invested on both sides of the market.

As such, oil companies, specifically oil refineries that deal in heating oil, and others need to be equipped enough in terms of knowledge and skill to manage such risks properly so that their business operations remain profitable over long time periods.
When refineries look to hedge their crack spread risk, they are typically naturally long the crack spread as they continuously buy crude oil and sell refined products. If refiners expect crude oil prices to hold steady or rise somewhat while product prices fall, they would sell the crack, which means they would sell gasoline or diesel futures and buy crude oil futures.

The crack spread is a crucial part of how refineries make their profits. By understanding how it works, refineries can manage their risk and develop strategies that work best for their specific operations.

Using a Crack Spread to Hedge Price Risk

The key to success for a refinery executive is their ability to effectively hedge the difference between their input costs and output prices. Crack Spread, which is referenced as such due to the refining process that extracts crude oil into its primary refined products, is the petrol industry's term for this spread.

By following simple step-by-step instructions, you can take advantage of the Crack Spread’s varying prices which are inversely related to the price of crude oil. While there are risks involved with trading the Crack Spread, it is one of the best opportunities available for those who understand it. With careful planning and analysis, you can leverage your knowledge to profit from this trading strategy.

Results from 2022 | Trading the Crack Spread With Crude Oil Refiners $PSX

Let's take a look at the results from 2022 to see how trading the crack spread with crude oil refiners performed. In 2022, we saw a significant increase in refining margins, which was a signal for traders to look for high-probability trades in the oil market. We analyzed the 3-2-1 crack spread with the refiner $PSX and found it to be a great opportunity to take advantage of the increase in refining margins.

Видео Thinkorswim Trade Tool: High Value Targeting For Crack Spread канала Jonathan Rose