Follow up on Oil Arbitrage Strategy
Posted on March 17, 2009 by Adam
I wanted to follow up on the arbitrage strategy I discussed last week.
Essentially, I bought a position in (DXO: 4.35 0.00%) and sold short an equally sized position in (OIL: 22.84 +2.00%). The idea is that, while both ETF’s track the price of crude oil, DXO has historically outperformed OIL. Keep in mind that DXO is double-leveraged so I used a half position size.
Since I opened the position I am down slightly, but I still view the trade as working. For example, as of this writing, DXO is up 7.23% and OIL is up 3.4%. On a basis of half a position size in DXO, that is equivalent to +3.615%. My net profit on the day is 3.615-3.4 = 0.215%. I’ll keep you updated.
This graph shows the profit/loss curve for the position when backtested from July 2008 onwards.
Be on the lookout for an extended pullback.
Comments (4)
Drex
March 20th, 2009 at 3:16 pm
Follow up - hadn’t seen you preliminary results:
Q1: Does the underperformer both earn less on the upside AND lose more on the downside?
Q2: I don’t quite understand how you are down slightly IF your net profit is +0.215% - can you explain?
Thanks.
Adam
March 20th, 2009 at 3:37 pm
Drex,
A1: On average, OIL always seems to underperform when compared to DXO. I don’t know why, exactly, but it probably has to do with what their holdings are and how they manage them.
A2: When I said +0.215%, I was referring to net profit on the day. At the time, I was slightly down since the position had been opened. I opened the position last week and as of right now I’m up +0.325%.
I’ll keep you updated!
Drex
March 31st, 2009 at 6:49 pm
How Goes Adam?
Just wanted to check back and see how it’s going with the oil strategy so far to date.
Don’t have so much time myself, but I have been using the little that I have to do a little bit of analysis on the data.
I have just had a chance to confirm your findings of generating a 22% return for the period between July 2008 and March 10, 2009.
But I have a question:
My chart of the analyzed data shows more or less zero return, maybe even slightly negative, for the 4-month period between June 19 - October 19.
Have you noticed that as well?
In any event, I’m rooting for you all the way so Keep Me Posted ! ! !
Thanks.
Drex
Adam
March 31st, 2009 at 7:06 pm
Hey Drex,
I’m doing pretty good. The market has been kind to me lately.
As of right now, I’m up 1.13% on this position, even though I’m down a little bit today. Based on my trading style, I tend to look for more aggressive profits, but this has proved to be a pretty easy trade so far. I’m going to continue to sit on it for a few months and just watch it unfold.
If you look at the trade over that time period, you get about a 0% return. You’re right. But looking out over the long term, the strategy is pretty reliable. When I’m done writing this comment, I will update this post with a graph that shows the profit/loss curve for a hypothetical trade dating back to last July.
You’ll see that the period you mentioned wasn’t the best in terms of performance, but the long-term trend is clearly up.
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