Thursday, October 14, 2010

Follow up post!

Back on September 24th I wrote a post about two current positions I had on. I just wanted to give a visual as to why I thought the Mar/Mar season RB/HO spread is an attractive trade to me.

If you recall I am long the March RBOB furtures and short the March HO futures. I am only playing the spread between the two and am not concerned with price movement in either direction. I am currently long 10 such spreads with an average spread at 18.80 cts under (meaning that RBOB is trading at 18.80 cts lower then the HO contract).

Lets take a look at the historical performance of this spread:

As you can see from the above chart I have plotted the perfomance of the Mar/Mar RB/HO spread for the past few years, with the dark blue line representing the average of all of the historical data from the past few years. With the execption of the 2008-2009 move this spread has worked out pretty well by moving from 20 cts under to about 2 under on average (September entry and Feb exit). I think that due to the huge sell off in the oil complex during the financial crisis that 2008-2009 can be thrown out the window as an anomoly.

Why does this trade work?

As we move out of winter and start begin to work our way to the peak driving season HO demand should come off and RB should be the dominate product in demand. This move will cause the differential between the two products to narrow, thus resulting in a profit. This same seasonal trade in reverse can be played as we get into the peak driving season where by you sell RBOB futures and buy HO futures, but I will save that for another post.

I have a stop in on the spread at around 23 under and I am looking for a move of around 15-20 cts towards and above the zero line. I am long the RB/HO spread with an average price of 18.80 under, as I write this post the spread is trading for about 16.28 under. This puts me about 2.5 cts in the money or about $11,000.

Size = 10 lots

Risk = 4.2 cts, $17,640

Reward = 10-20 cts, $42,000 - $82,000

I am tentively going to hold this thing until Febuary, unless I am able to 10cts or better before then.

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