Bull and Bear Spreads
Chapters in this video
- 0:00 The flat price illusion and the oil crash riddle
- 1:13 Flat price vs differential: the tide and the boats
- 1:48 Trey the bull spread: long nearby, short deferred
- 3:33 The flat price fallacy: crashing markets and bull profits
- 4:44 Hank the bear spread: short nearby, long deferred
- 6:06 Profit ceilings: unlimited bull vs full-carry bear cap
- 7:24 The physical-commodity model and financial futures reversal
- 8:52 Rapid-fire exam recap
What this video covers
- Why the profit of a bull or bear spread depends on the differential between contract months, not the outright flat price of the commodity
- Which leg is long and which is short in a bull spread, and how the memory aid "the bull charges out in front" locks this in permanently
- Which leg is long and which is short in a bear spread, and why swapping the legs completely reverses the trade
- How a bull spread can profit in a crashing market when the nearby falls slower than the deferred, narrowing the gap
- Why a bull spread's profit has no theoretical cap while a bear spread's profit is capped at roughly full carry by arbitrage
- The exact condition that causes each spread to win: gap narrowing toward inversion for the bull, gap widening toward full carry for the bear
- When the physical-commodity model for leg responsiveness reverses, and why financial futures demand a different framework entirely
Read the full lesson, free
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