A Call Option on Commodities Regulation

I am sure we all have been hearing a lot about the move to curtail speculative trading in the commodity markets. I thoight this was an interesting article. Whether one thinks speculators are net positive/negative for the market and the society (I personally think ETFs should be outlawed but let professional speculators speculate) I think it is likely that passage of speculative restriction would at least send the price down temporarily. Could I make money off this?

I thought perhaps I could buy some OTM puts on WTI. Turns out these options are still way too diamn expensive due to volatility and time value. Then I extended my analysis: who gets hurt if such rules get enacted? Can I buy some OTM puts on CME (who owns NYMEX where WTI is traded)? Well, these options are still too diamn expensive. What then - how about shorting CME and hedge out the equity beta portion by going long another exchange stock with minimal exposure to commodities? NYX perhaps?

The two stocks are very highly correlated so it seems to me like the equity sensitivity portion can be hedged. NYX seems to have higher dividends than CME which is good. Must look into how much commodities contribute to CME's earnings.

Though I wonder : is NYX gonna get hammered if that whole HFT thing gets busted up by the gubment?

Crude Timespread - Gittin' Tight

crude timespread tightening hard on today's DOE number.

Do I want to short this sumbeetch? Technically the spread ain't all that tight. I would like to see it pull in another 50cents or so to give more room for error. Fundamentally, I fail to see any reason for strength. distillate stock is way high. And gasoline while it has nearly reached the end of consumption season hasn't budged much. Unlikely refineries would rush to buy more crude even though crack spread remains ok still.

A-shares -- a Leading Indicator for Copper?

1. It is postulated that Shanghai A-shares are now the leading indicator for the world economy. Or at least the world seems to think and react that way. This is because the world believes that China is the growth engine that will power us all out of recession. Any hiccup in China seems to be felt around the world in most major asset classes – especially in commodities and stocks.

2. It is also postulated that industrial metals have taken on a very financial assets-like nature (especially as of late) due to excess Chinese liquidity turning many there into speculators in the booming metals market. correlation between the two assets are at the highest point in a while.






3. If you believe that copper and A-shares have the same underlying drivers (speculative fervor of the chinese public and accommodative financial policy), then it’s worth a look at current price action where the A-shares have been sharply down. Call me crazy but it seems to me like copper has the tendency to trail the A-shares on big moves.

4. So, given the recent big fall in A-shares give us a tradeable signal? Obviously, it all comes down to getting the direction of risk right. If the A-shares go on a sustained drop then I would think every risky asset in the world would follow. BUT if you have a mandate to trade copper the A-shares could provide a useful turning signal.

DISCLAIMER: I obviously do not spell out all the details of my research and will intentionally leave out some crucial stuff. Also, it is quite possible that I might already have established a position in any trade idea I discuss here.

Is There a Play Here? - LME Copper Curve

What's up with the LME copper in backwardation?



When the copper inventory is going up?



LME warrant cancellations are going nowhere:




Comex copper curve looks way different:


Time to short the timespread in LME copper? My guess is the backwardation might be caused by long only money and trend followers jumping in?

Oil? I don't see no fundamentals at play here

DOE released oil inventory numbers today and it is bearish all around with inventories in crude, gasoline and distillates all up substantially. As of now crude is hanging in there but refined products are down - despite a pretty big rally in stocks and USD taking further pounding.

How the hell is crude at $70 when demand is just not there? keep in mind that crude was around 25 bucks as of end of 1999 when the economy was booming. Has EM demand increased that much (maybe it has)? Because as you see below, US demand hasn't gone anywhere (although this probably isn't the best measure of inventory as implied demand is backed out from inventory changess).



And inventory is still sky high:


People say industrial production/manufacturing is rebounding but distillate inventory keeps piling on.




Now, it is entirely possible that distillate buildup was due to refiners taking advantage of very generous crack spread lately. To me, interesting trades are to be made in cracks. I have no idea whether oil should be at 60,70 or 80. Personally I am inclined to short but don't want to get caught on a wrong side of a directional trade in this market.

gasoline crack: