Tuesday, August 12, 2014

Buying cold, selling heat...


We are in a good season, at least in the northern Hemisphere, heat, holidays, who can have them, getting tanned... forgetting winter, snow, central heating..., high gas or electricity bills... or, for some people, heating oil invoices...

That is why is it a good moment to pay some attention to one Spread that may get some advantage of that...

One known strategy for that is buying a futures spread on Heating Oil. The idea is that, in winter, mainly if a very cold one is expected, there are often some bottlenecks in this product that catapults the price of HO for December a lot, but keeps the futures of HO for next months at lower prices..

For example, the behaviour last year, 2013, HOZ Dec13 - HOM Jun14 was this:



Basically the difference HOZ13 - HOM14 was around 0.03 in summer and went up to 0.16 at end of October.

The strong point of this spread is that it is very difficult under 0 in this season and until end of novembre, when it is clear whether we face a cold winter or not. So, buying the spread when both futures are very close, in summer, we have good chances of getting a good benefit by mid October.

Basically every cent in this spread is worth 420$, so, if we can get 10 cents from now to mid October, well, not bad. Of course, don't forget some stop on the spread, maybe at -0.02 or so in case of a Black Swan..

In my case, I have just bought the spread today,  bought Dec at 2.8750  sold  June at 2.8484 $, that is, 0.0266 Difference.., I selling the spread at +0.10 at least.., lets see in October or so...

As usual, this is not a recommendation, just explaining my personal trading...

Good summer..