MyDVICE

- LETTER & VIEWS by NEV R. AGN

Wondering for an update: price as of close 25 June 2021 (on structure proposed on 16 June 2021).

28 June 2021

The following option structure was proposed to take advantage of an overshoot of the gold:oil ratio to 12:1 (assuming gold maxes out at $1900 over this period, this would equate to a Brent price of over $150).  However, this strategy will limit itself to an 18-month Brent target of $125.

16 June 2021 entry prices for the strategy:

1.  Sell December 2021 WTI 56 Put, Expiry 16 November 2021, premium received = 1.54.

2.  Buy December 2022 WTI 90 Call, Expiry 16 November 2022, premium paid = 1.29.

Structure receives premium = 0.25.  Delta neutral, net Vega = +0.07, net Theta = +0.004.

IF CLOSED, the following are the 25 June 2021 exit prices for the strategy:

1.  Buyback December 2021 WTI 56 Put, Expiry 16 November 2021, premium paid = 1.20.  Future reference = 70.69.

2.  Sellout December 2022 WTI 90 Call, Expiry 16 November 2022, premium received = 1.46. Futures reference = 64.27.

Structure receives premium = 0.26 on unwinding.  Add the initial 0.25 received at entry, gives a total profit of 0.51 (USD 510 per structure lot).

The structure is currently net Delta = +6, net Vega =  +0.10, net Theta = +0.076.

METALS #7 - ENERGY #13

Further thoughts: 

(a) Excellent cointegration of Brent and WTI and the long-term equilibrium of the spread.

(b) Cointegration of the volatilities between Brent, Gold and the Gold:Brent ratio.  It is the price of Brent that moves more to correct the Gold:Brent ratio back to its long-term equilibrium level.

(c) Notice how similar the two charts below are.  Does the Gold:Brent ratio cointegrate well with the Brent-WTI spread?

(d) What is our exit strategy/target profit?  Holding period?  To be discussed in the next post.

7Y Weekly – Gold:Oil Ratio

35Y Monthly – Brent-WTI Spread

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