MarketsMuse Global Macro Trading dept. merges with our ETF dept. to provide the following excerpt profiling a compelling and conservative Crude Oil-centric strategy courtesy of global macro think tank Rareview Macro LLC. The following was posted to subscribers of “Sight Beyond Sight” on Wednesday, May 27. Irrespective of subsequent three day’s pricing and trade activity across crude oil marketplace, MarketsMuse editors have determined the strategy proposed by Rareview Macro’s Neil Azous remains ‘evergreen’ (for the time being).
Today we got long on WTI crude oil in the model portfolio. Take it for what it’s worth, but this is the first time we have traded Crude Oil during this entire corrective phase stemming back to last summer. As per the March 18th edition of Sight Beyond Sight, when we put a long crude oil strategy on our watch list for a reduction of the severe contango in the futures curve, we are finally comfortable with the risk profile, especially considering volatility has been reduced by more than half since then. Sadly we did not deploy a position on March 18th as it coincidentally was the day the “barrel” bottomed.
The reason we chose to utilize a risk reversal approach today to get long on crude oil is because of the pronounced put skew in the term structure. For example, the structure we entered captures seven volatility points of skew on the ask side.
We like the risk-reward in this position. For example, if the November 2015 crude oil future (symbol: CLX5) were to fall $6 in the next one to two months, the strategy stands to lose ~$1.4mm. Conversely, if it were to rise by $6 in the same time frame the expected profit is ~$3.2mm, which returns a profit ratio of 2.28:1.
Sidebar: A similar strategy can be employed in the US Oil Fund (symbol: USO) by buying the 10/16/15 $21.5 calls and selling the $16 puts, but the ETF position is vulnerable to the shape of the futures curve moving further into contango. Continue reading