$_it’s getting real!

Posted on 07/27/2011


While the Treasury (Bond) market is still telling us Congress is going to get a deal done on the debt ceiling (read: kick the can further down the road) the equities and other risk markets are moving lower this morning.

Last week’s Crude idea is working well on the heels of the Weds. inventory data (http://www.bloomberg.com/news/2011-07-27/oil-falls-in-new-york-after-u-s-supplies-climb-durable-goods-orders-drop.html) . AT this point we’re looking for days to go by and Crude to meander/drift lower. That way we have both decay and the trend working for the position. If you took the more aggressive recommendation and sold the 108 call (or some other upside to finance the position) I always prefer having a GTC bid to cover. In this case, a .05 bid to buy the 108 calls makes sense to me.

In a classic example of addict behavior, I’m tempted to be SHORT Sept. RBOB (Gasoline) and be LONG Sept. HO (Heating Oil) looking for some mean reversion (that ‘mean’ is subject to debate).

I could write ad nauseam about this spread, which is a variation on the slightly more traditional ‘crack spread’ and that is NOT a misnomer! This spread is fast acting, can be very expensive (it cost me a job), and it may create some degree of paranoia (but there is also something strangely compelling about it).

I will elaborate on the intricacies of this spread relationship later, but I’ll include a visual for those so inclined.

Cliff Notes: I was LONG RB and SHORT HO (using options – which limited exposure) in early mid March. Following the devastating earthquake and tsunami in Japan this spread made a swift move lower (in favor of HO) and I was handcuffed (trading lingo whereby you desperately want to add to a position, but just can’t bring yourself to do it).

By early May my original position was a huge winner and in textbook risk-taking form I decided to EXIT and then GET SHORT (again using options and a couple outright futures spreads). Historically this relationship makes tops in or around early May, technicals were stretched, and I positioned by buying RB puts to sell HO puts, so in the event the complex just continued higher I had very small dollar risk.

“The best laid schemes o’ mice an’ men/Oft go awry” –

Perhaps Steinbeck would have made an excellent risk manager.