Monday, February 14, 2011 7 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CIX

A day late for the Sunday Spectacle... Sorry about the lack of posts... I've been trying to get my dating life going and that's consuming a great deal of time, with no luck so far :( ... wish me luck... For now, something on the oil market...


(source: "WTI v Brent," The Globe & Mail, February 14, 2011)

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7 Response to Sunday Spectacle CIX

octacomm
February 17, 2011 at 4:37 PM

I believe this is one of the best investment opportunities this year mostly because the risks are very low and the return could be good. One can sell Brent and buy WTI for equivalent amounts and wait until the spread diminishes what always happens. There is no logical and economical point to have 15% more expensive oil in Europe than USA for long-term. It is short-term...
I believe the maximum risk is 5% temporary loss on such investment streatygy and the return will be 14-15% after sometime. The risk is mainly if someone bad happen in middle east but I doubt any oil shippments will be stopped or won't be able to be replaced from other sources.

I have already put a significant amount in this strategy. Not sure why nobody talks about that but everyone do talk about stocks or other overvalued investments right now ...

Sivaram Velauthapillai
February 17, 2011 at 10:18 PM

I agree with you that this looks attractive. But the problem with arbitrage strategies like this is that the resolution could take a while. If it takes less than one year, then the return is pretty good; but if it takes 2 years, then you are only looking at around 7% to 8% return per year.

How are you implementing your strategy? Are you using futures contracts?

Sivaram Velauthapillai
February 17, 2011 at 10:18 PM

I agree with you that this looks attractive. But the problem with arbitrage strategies like this is that the resolution could take a while. If it takes less than one year, then the return is pretty good; but if it takes 2 years, then you are only looking at around 7% to 8% return per year.

How are you implementing your strategy? Are you using futures contracts?

octacomm
February 18, 2011 at 4:53 AM

Looking from the history for reference and the crazy movement I doubt that it will take 2 years to play out, of course everything can happen. I mean, the transportation sector can take care very fast of this situation and by change of deliveries and re-location of oil orders. That's why I think it's not real to have such a difference between USA and Europe prices.

Currently I'm using CFD(Us crude) and Futures(Brent) mainly because I can adjust the CFD's worth the same as the big futures contracts (to be equivalent) and I have 17 and 19 dates of expiration, will roll-on on 16 next month. The roll-on could add to some loss of profit but it won't be so much. In fact even if it takes 2 years for 7-8% return, I still count that good because I use margin (my equity can't go much down because of that position) and I can continue trading. Also I believe this is low risk arbitrage so the return is good for such king of strategy.

octacomm
February 18, 2011 at 9:49 AM

I just logged in to see that I have made about 8000 USD from that arbitrage just for today. When I opened my position the difference between brent and us crude was aprox 14 USD, now it's 11.25 USD, so as I said, this won't take two years to play out...

Sivaram Velauthapillai
February 20, 2011 at 1:48 AM

Good job. I don't think it'll take 2 years for the gap to be closed but I like to look at a bearish case just to contemplate the scenario. Some of my arbitrage-type investments have taken way longer than I was expecting.

octacomm
February 20, 2011 at 11:40 AM

Is it a secret what kind of arbitrage-type investments are you making? Also do you have a skype? I would be glad to talk with you on chat.

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