After an exhausting but fruitful hunt for OTM calls that are priced as if the possibility of tail risk was ignored or underestimated by options underwriters using the same model for all small cap energy stocks. After looking over tons of historical data and running through every scenario that could result in a:
- Rapid and sudden increase in the value of the contracts as the underlying security increase in price at a rate previously unmatched within 5 years but prior to then this rate of change was a common or repeating occurrence.
- A sudden change in the availability of a crucial commodity that is produced by the company when generating profit
- The value of the company should be reflected by the reserves that are profitable to extract at prices higher than current commodity prices but lower that previous highs.
- Storage of the raw and refined commodity is both impractical and expensive on a large scale
- Regulatory, Tax and Consumer Preferences have a major impact on the availability of the good
- A shortage of the good would result in widespread economic and financial losses but is hard to predict and impossible to prevent
- Market fragmentation geographically, along the value chain and volatile changes in liquidity of investment vehicles.
- A short squeeze or rapid transfer of capital to the long side of a stock to prevent losses from bears .
- A weak share price over the last few years to help justify the reduction in holdings for non financial reasons (ESG)
- A sharp drop in share price owing to very temporary news
- No/unreasonably small increase in the cost of similar options with longer durations and or closer to the money strike prices
- Contracts that cost less than $0.10 that could be exercised for a profit in less than a week of steady gains equal to 1/3 the average daily price move
- Focus on absolute changes in value over the relative changes in value that would result from different commodities influencing the demand for each other and what would cause the relationship to become decoupled or distorted
- Commodities with a high number of end uses but a low number of alternative goods.
- Unhedged, dirty beta and less than liquid are desirable only if there is a below average number of market participants.
- There should be clear indications of shortages in some regions or countries.
- China will need it to fuel growth in the future.
- There is always significant arb opportunities but they are hard to capture
- Under no circumstances could a new technology or innovation disrupt the market for this commodity in the near-mid future
- A high barrier to entry and limited number of quality companies in the industry.
Current Examples: BTE July and June Calls 1.5 Strike picked up at 15 cents.
Look at my post history: The numbers don't lie and BIR, TK, DBA calls have been major gains.
I studied energy infrastructure in China and spoke to officials in the government overseeing energy legislation. I interviewed the top commentators and public + private fund managers. I have 5 papers and a ton of reports to back up my FA. Empirical evidence mounting and market validation up the wazooo.
Spoiler Alert: Natural Gas and Condensate producers are priced as if they will rise in a linear and predictable way that mirrors their 5 year downward trend caused by an event that cannot be replicated to the extent it was 5 years ago.
I have waited until a significant number of these experimental trades have been executed and studied by myself in an open and transparent process involving me making posts in communities on the internet including this forum outlining the opportunity and specific rational for that contract. So far the average position size of $122.5 USD has returned $660.00 dollars net of tcosts and borrowing fees over a period of 1 year.
2 contracts have expired worthless and only one of them was never ITM. Why do electricity and nat gas prices SPIKE when expressed as the share price of ETPs employing a VIX like rolling of (constant maturity futures)? The inability to store the physical commodity in order to offset the risk of delivering a future contract at a price many times higher than both spot and long dated contracts cannot be mitigated for volatility, gas and electricity like with other commodities.
In a 2018 study by Avellaneda and Papanicolaou the VIX volatility skew and tail size compared to that only of other commodities that can not be stored and distributed easily (electricity and nat gas).
Partial backwardation periods for Nat Gas are common during severe weather events and create periods where the spot price rises well above the long term average price. A temporary rise in commodity price is enough to generate a slightly delayed and less significant, but both in absolute/relative terms large enough to cause the intrinsic and extrinsic value of the calls to more than double in addition to premiums for hedges to increase as well.
Because the lower liquidity of natural gas derivatives, hedging using longer dated futures as opposed to options is far more common and retail investors can take advantage by needing less liquidity to hedge long positions in small cap stocks and realize gains by exercising or selling the calls.
The time decay is offset by several unique characteristics. The first consideration is the ability of the natural gas producer to lock in sales at peak prices due to the extreme social and economic cost of forgoing electricity generation using gas turbines and diverting residential heating fuel. This means selling cash secured puts and exercising some calls with the residual risk capital left over from subtracting the cost of buying the calls from the return. The long term change in retained earnings and book value of the company will prevent a mean reversion in the stock price following the spot prices rapid correction. The common shares left over then become ideal for CC writing and selling cash secured puts while IV is high but new earnings and sticky commodity prices help prop up share prices.
The importance lies in timing of buying of options contracts designed to cost small amounts of premium over time, in exchange for a return on investment that is many times the value of expired contracts. During periods of very low volatility, purchasing the majority of OTM and longer dated contracts gives the ability to max the return on capital due to gamma and the lower marginal cost increases when buying longer dated contracts.
Submitted June 01, 2021 at 04:45AM by Cleangreenprofit https://ift.tt/3vE8kJy
