Gasoline Straddle - another one from Stuie Johnston

[wayneL]

Lifted from another forum, FYI.

IV chart below

Gasoline traders
SAJ - Sunday at 6:23 PM

The IVs in RBX aren't as low as they might be, but they're on their butt in any case.

Suggest a straight IV differential trade: buy the ATM (202 strike) straddle for about 25 cents, call it 12.3% of gross.

Even throwing out 2005 (Katrina/Wilma/Rita), the **average** upside move is over 17%, going back to 1993. (BTW, I'm not sure that's proper, statistically, given that the gasoline mkt has changed radically -- and not only in price! -- since '93). If we resrict the time frame to 2001 et seq., when the gasoline mkt began changing structurally, the average upmove is 20.76% **still** excluding 2005.

So, some skeptic is saying ''Why buy the straddle, why not just the call?'' Easy Q, because down years are sufficiently common that the straddle purchase has been profitable in **every** year, whether starting in 1993 or 2001. The straight call purchase has been a loser a third of the time (twice in 6 years since 2001, 5 times in 15 years).

Too, the down years themselves are sizeable when they occur, a bit more than 18% on average.

Also, there are two years, 2006 and 1994, where the trader might have profited on **both** sides of the straddle. Just another little advantage.

The trade looks, statistically, like making about 22-30% on capital in less than 90 days' time. Certainly a good enough ROC for yr hmbl srvnt. Naturally, if a big hurricane comes into the Gulf, this ROC figure will rise apace.

The drawback is of course laying out $10.5K of capital or so. Nevertheless, if you happen to have that amount of capital free, you can do far worse than straddling RBX right now (for instance, you could be gambling on corn and beans...g!).

Good trading to all !

 

[ducati916]

enzo

That looks a solid trade.

jog on
d998

 

[wayneL]

enzo

That looks a solid trade.

jog on
d998

The thing I like about Stuies suggestions is that though they are sound trades on the basis of volatility, they have the added dimension of the seasonal/historical studies as well. So we get a reasonable idea "when" these babies are likely to move and the possible magnitude.

His historical database at www.timeandtiming.com is a beauty (No connection blah blah)

 

[ducati916]

enzo

Thank's for the link, I'll have a look.

jog on
d998