To The Moon

Every week, Owen talks through some of the trading opportunities and strategies in the current market that are worth watching. This time we won't dwell on preliminaries and will get straight to the point. I believe there are two main opportunities to focus on this time:

First, the crude oil crack spread has now surged to a historic extreme. How to find the right timing to short the spread is a highly noteworthy profit opportunity.

Second, U.S. equities are currently stuck in a high-level, range-bound pattern. With tonight's upcoming CPI data as a catalyst, how should we use an options straddle strategy to bet on a return of volatility? This is likewise an opportunity worth exploring.

Let's look at them one by one.

$标普500(.SPX)$ $标普500ETF(SPY)$ $SP500指数主连 2609(ESmain)$ $微型SP500指数主连 2609(MESmain)$ $标普500波动率指数(VIX)$

Let's first briefly discuss U.S. equities. Judging from the latest "The Flow Show" fund-flow data released by BofA's Hartnett team, net inflows into U.S. equities widened slightly last week — but this occurred against the backdrop of a modest net institutional outflow the week before:

$纳指100ETF(QQQ)$ $纳斯达克(.IXIC)$ $NQ100指数主连 2609(NQmain)$ $微型NQ100指数主连 2609(MNQmain)$ $道琼斯(.DJI)$ $道琼斯指数主连 2609(YMmain)$ $微型道琼斯指数主连 2609(MYMmain)$ $1/100道琼斯(DJX)$

This pattern is especially clear in semiconductors: after a large net outflow last week, institutional money again showed a large net inflow.

$三倍做多半导体ETF-Direxion Daily(SOXL)$ $英伟达(NVDA)$ $MACH7 TECHNOLOGIES LTD(M7T.AU)$ $纳指100ETF(QQQ)$ $纳斯达克(.IXIC)$ $NQ100指数主连 2609(NQmain)$ $微型NQ100指数主连 2609(MNQmain)$ $南方两倍做多纳指(07266)$ $南方两倍做多海力士(07709)$

What does this tell us? It shows institutions have not formed a long-term bullish consensus; instead they are running short-term arbitrage. They are not bottom-fishing, but making "short-covering buys" after selling. The market is locked in a classic high-level tug-of-war, with everyone waiting for a short-term directional signal.

So, is there a suitable strategy in this choppy market? I think you can still consider using an options straddle to bet on a rebound in volatility. The straddle I put on earlier has already booked some profit.

Technically, U.S. stocks show no clear sign of a major pullback. S&P futures currently display a textbook ascending triangle; momentum is still strong and an upside breakout could come at any time:

But fundamentally, high-rate expectations are again pressuring the market. CFTC data show that speculators' and hedge funds' degree of bearishness on SOFR futures has reached a nearly six-year high, reflecting an extremely strong bullish view on short-term Treasury yields:

The 2-year Treasury yield is still in a rising channel; the market has fully priced in two rate hikes — "one this year, one next year."

In this conflicting long/short environment, the key CPI data will be released tonight at 8:30. My assessment:

•  If CPI comes in hotter than expected, U.S. stocks will most likely break down and correct.

•  If CPI is mild or below expectations, U.S. stocks may break out modestly to the upside.

This kind of scenario — uncertain direction but potentially amplified volatility — is well suited to an options straddle / strangle strategy.

Specific approach:

•  Buy at-the-money calls and puts on the S&P 500 or Nasdaq index expiring two weeks out.

•  If CPI triggers a one-way move, the profit on one leg can cover the cost of the other.

Note: options' time value decays quickly. If the trade is not profitable within three days after the CPI release, consider cutting the loss and exiting, and wait for the next volatility opportunity.

Next, the second opportunity: mean reversion of the crude oil crack spread

For investors with ample capital, there is currently a relatively rare combination-strategy opportunity — shorting the crude oil crack spread. What is the crack spread? Simply put, it is the profit margin a refinery earns by buying crude oil and selling it after refining it into gasoline and heating oil.

The current situation: the spread between U.S. retail fuel prices and spot Brent crude has climbed to its highest level since 2012.

In other words, refining margins have reached their highest in over a decade, comparable to the extreme conditions of 2022.

Why is this happening?

$美国原油ETF(USO)$ $WTI原油主连 2609(CLmain)$ $小原油主连 2608(QMmain)$ $微型WTI原油主连 2608(MCLmain)$ $天然气主连 2608(NGmain)$

If you compare the moves in refined fuel and WTI crude, you'll find that over these past few months fuel has fallen far less than crude.

The main reason is that retail fuel prices in the three big demand countries — China, India, and Russia — have fluctuated only within a limited range.

There may be two reasons behind this:

First, the market expects the war to continue, so energy prices still have room to rise.

Second, the decline in crude has not yet fully passed through to end-retail prices, so a catch-down may occur in the future, thereby narrowing the spread.

But whatever the reason, such an extreme crack spread cannot be sustained for long, and pressure to revert to a reasonable level is building. Therefore, we need to look for opportunities to short the crack spread.

Specific strategy:

•  Short 2 lots of gasoline (RBOB) futures + 1 lot of heating-oil futures.

•  Simultaneously go long 3 lots of WTI crude futures as a hedge.

•  Note: do not use Brent crude, because of the grade (crude-type) spread.

The core risk lies in the stop-loss:

If WTI breaks below its 20-day moving average, it means crude may keep probing lower while refined products fall only limitedly, so the crack spread could keep widening — at which point you must cut the loss decisively. At the same time, note that even if the crack spread keeps widening, we do not advise chasing it higher, because reversion from the extreme is the higher-probability direction.

What if you want a more robust way to participate while the spread is still widening?

You can consider:

•  Go long the energy-sector ETF (XLE)  $SPDR能源指数ETF(XLE)$

•  Or go long a typical refiner, such as Occidental Petroleum  $西方石油(OXY)$

The logic is simple:

As long as the crack spread stays elevated or keeps making new highs, refiners' profits will keep surging, and the entire energy sector will benefit and trend higher.

From a technical perspective:

Currently XLE is meeting resistance near its 20-week moving average — a spot where the lower bound of the prior consolidation range and the moving average form a confluence resistance:

This level may well be the turning-point zone for the crack spread; but if XLE breaks out strongly, it would mean the crack spread will keep widening, and you could consider staying long XLE with the trend.