Play the Volatility

Andreas Anastasiadis

April 1, 2024

As systematic risk (geopolitical, social unrest, etc.) intensifies, traders typically turn their attention to investment strategies that pay on off-the-charts movement, either up or down. The butterfly calendar spread is considered one of the most conventional strategies. This article will give a fundamental view of a 6-month butterfly calendar spread, using June 2024, December 2024, and June 2025 contracts for both WTI crude oil and natural gas. Current prices for WTI range from $74.6 to $82.4, while natural gas prices vary from $1.99 to $3.44.

Traders may consider employing a butterfly calendar strategy with futures in commodities trading when they anticipate relatively stable price movement within a defined time frame, coupled with an expectation of increased volatility afterward. This approach is particularly useful when there’s uncertainty surrounding upcoming events or market developments, allowing traders to benefit from both the stability and the subsequent volatility in commodity prices.

On the other hand, traders may desire to exercise caution and avoid implementing a butterfly calendar strategy with futures in commodities trading during periods of high uncertainty or rapidly changing market conditions. During volatile environments, traders may find it more prudent to employ strategies that offer greater flexibility and risk management, rather than relying on the specific timing and directionality inherent in the butterfly calendar approach. In that case a reverse butterfly calendar spread should be taken into consideration.

WTI crude futures rose above $82 per barrel on Thursday, marking a third consecutive monthly increase fueled by optimism around continued production cuts by the OPEC+ alliance. Meanwhile, the most recent report from the EIA showed a surprise rise in US crude oil, reporting a 3.17 million barrel rise in crude oil stocks, contradicting expectations of a 1.28 million barrel decrease. Concerns were heightened by Ukrainian drone strikes on Russian oil refineries impacting 12% of the country’s processing capacity. Additionally, the market remained attentive to geopolitical tensions in the Middle East, specifically the UN Security Council’s resolution urging a ceasefire between Israel and Hamas. Additionally, the rise in US refinery utilization rates further supported prices.

Figure 1: WTI 6-month butterfly calendar spread

US natural gas prices rose above $1.7/MMBtu due to a larger-than-expected storage draw reported by the EIA and increased demand forecasts for the next two weeks. The report also showed that US utilities built up their inventories for the first time since November, likely to end the seasonal inventory depletion. Utilities withdrew 36 bcf of gas from storage, exceeding the 28 bcf draw expected by the market. Despite a 25% drop in prices in Q1 following a mild winter and high output, prices are expected to remain under pressure due to forecasts of mild weather, ample gas in storage, and reduced gas flow to LNG export plants. These factors may lead to record-high US gas consumption in 2024 and the first production cut since 2020, when the pandemic drastically reduced demand.

Figure 2: Natural gas 6-month butterfly calendar spread