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Option Trading in Practice – Week 5

7 Jun 2018,

Dear readers and traders, in today’s article you will find both a summary of last week gas trading and a demonstration of a new trading approach – a pair trade (or a double short ETF). I have already written about this kind of trades in the past as a possible alternative approach for trading inefficient ETFs and today I will show you a practical demonstration.


Summary of the week

This time, we have also added this Monday to the reporting period. The reason is simple as there was no trade last week, we wanted to bring you something interesting while waiting for the disintegration of the time option premiums, and on Monday we decided to point out to another possible trading approach.

First, we summarize the performance, which is -1.10% since the launch of this series. The price of natural gas went up slightly against us last week, but around the price $ 3 for Bcf of gas a certain resistance has been created with signs of a possible decline. The positive fact is that the contango is keeping close to 0.5% this month, which for the BOIL instrument means 1% monthly wind in our shorting sails.

It is too early to make a graphical representation of contanto and inefficiencies effect. In one month, the changes are negligible so far. But at least to make a small demonstration. from 1.5. until 30.5, the first futures contract on natural gas rose from 2.763 to 2.885, this means an increase of 4.415%. On the other hand, ETF: BOIL, which is 2 times leveraged natural gas, has grown from 26.95 to 28.60 at the same time, this means an increase of 6.12%. In this month we have seen a cumulative inefficiency of about 1.7%. So, our account is in loss, but if the gas price goes back to the level of 2,763 (and not even so down) we will be back in profit.


A pair trade

Because trading with monthly options is relatively “boring” due to the account activity, we would like to show you another possible approach. It’s nothing alibistic in the sense “last month we were in the minus, so we switch to another trading mode.” Not at all, please do not take it in this way. We stand behind our approach, it is a firmly set strategy and we will continue for at least another 12 months in order to be able to present you what can shorting inefficient ETF do.

But to make this article more interesting, we would like to mention a few words about short/short pairing of inefficient ETF. As you already know from my previous articles, inefficient ETFs are declining because of leverage. And since natural gas is a relatively volatile commodity, it is quite attractive to short two opposing ETFs against each other – 3x long natural gas vs. 3x short natural gas (ETN: UGAZ vs. DGAZ). Both ETFs fall in time, but they are balancing themselves on a daily basis. In order to demonstrate this effect, we have shortened about 5% of the account on UGAZ and 5% of the DGAZ. On a weekly basis, we will evaluate and show you how the position develops. You can find the parameters in the account statement, but to make it clearer, it was 200pcs short DGAZ for 22,69 and 68pcs short UGAZ for the price of 66,17USD.

That’s how we got into the position on Monday, and we’ll be waiting until it’s in profit, including covering the cost of shortening. Once the position is in profit (this may be a period of 2 weeks, perhaps longer), we rebalance the position.

To make it complete, I add that the IB account (portfolio analyst) results can be found after signing in to the client account here at Quastic. If you do not have an account yet, you simply enter your email below and all information will be sent to you via e-mail.



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