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As you know, the oil price was negative on April 20th 2020 due to the future contracts expiration date. I am wondering why traders had to wait until 1 day before expiration to close the position (sell or buy) or rollover but not some other days earlier? they were waiting to make decisions or because trading at that time is easier to find sellers or buyers? I'm a newcomer to the market. I really appreciate the help from all of you. Thank you in advance.

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  • Ever hear the expression 'getting caught with your pants down'? – Grade 'Eh' Bacon Apr 24 '20 at 13:36
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    Sellers of options and futures contracts hold on for two reasons, price improvement due to decay and price improvement due to movement in the price of the underlying. Knowing that one should have sold at an earlier date is a function of hindsight. You can't know what the best date was to sell until expiration. – Bob Baerker Apr 24 '20 at 13:59
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They weren't forced to sell on that particular day - in fact they could have sold the next day (on the day of expiry), or they could have sold the day before. But they were facing a ticking clock and as the market started to move down some were apparently willing to get rid of these contracts at any price. Those that had the guts to wait until the next day were able to sell them for up to $9, but no one know the day before whether the price would rebound or not. It's not necessarily easier to sell on any particular day.

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  • Unfortunately some brokers did not support negative prices and did not let their clients get out when they wanted to. One broker said that due to the extremely negative closing price that day, many "incurred losses in excess of the equity in their accounts", and therefore they were not afforded an opportunity to get out above zero the next day. Their broker liquidated them at -37.63, because for all their broker knew, oil could have dropped to -200 the next day. – 7529 Apr 26 '20 at 6:29
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Traders of futures contracts, not taking delivery and not making delivery, should move to the next dated contract at least when that contract has more volume than the current contract.

And ETF's move to the next contract on a calendar schedule.

So who held on ?

A buy-side wouldn't be inclined to hold-on unless they could take delivery. The oil had more value than the value of the contract and so just take delivery. Well they might sell looking to re-buy delivery at a lower cost a few hours later.

A sell-side could be inclined to hold-on because of the extreme contango value even if not making delivery. But the sell-side has to eventually buy to get out if they are not making delivery.

It looks like the sell-side was making delivery and so not buying. And the buy-side was taking delivery but tried to get a cheaper contract by selling and re-buying.

It looks like an industry oil-trader panic and not a speculator panic. And the situation could have been a low volume pricing.

The buy-side might have bought more to average their price but oil storage was limited.

Oh, I didn't consider the crash to be a market-maker flash-crash because the traders still in the contract should have been those taking or making delivery. But the market-makers could have just left the market because the futures market is ultimately based on an accounting of delivery.

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  • It turned out that day traders using leverage were buying at low prices thinking that zero was the point of maximum loss. But then when prices went negative the trading systems would not let the positions be closed out. Of course sell-to-close at near zero is downside pressure. Someone might sell two, for every one held, at near zero and gain from the downside. – S Spring Sep 25 '20 at 8:02

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