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Wednesday, August 26, 2020
Sugar Raw and Sugar White
*This performance is only observed with historical backtests and not traded by the company.
Sugar Raw and Sugar White are known to have a very high correlation of +80%. But what's not known is that between the period of September-November Sugar Raw has outperformed Sugar White in 9 out of the last 10 years. While the reverse is true between the period of March-May where Sugar White is seen outperforming Sugar Raw.
The table below shows the performance of Sugar Raw and Sugar White between September-November period for the last 10 years. Historical data shows that in a $100,000 account, buying sugar Raw worth $250K and selling Sugar white $250K between September-November period for the last 10 years would have resulted in almost 200% profit with 5x leverage. That strategy offered a hit ratio of 90% with max gain of 54% and max loss of -2%, while the average return was 20%. (Transaction costs have not been considered in the returns below)
|Performance from Sep-Nov period every year (generic contracts)|
|Year||Sugar Raw Return%||Sugar White Return%||Buy Sugar Raw Sell Sugar white 2x leverage||Buy Sugar Raw Sell Sugar white 5x leverage||Profit in each Year $250k exposure on both sides||Cumulative Account value $250k exposure on both sides|
Technical analysis also supports the current pair trade signal. As can be seen in the lower half of the graph below, Sugar Raw-Sugar White Ratio has oscillated between 0.03 and 0.04. Currently the ratio is near the lower end of the range and is expected to increase further. Besides, the ratio has bounced from the support line and is expected to rise further. Also, its visible in the upper half of the graph, that prices generally deviate between September & November.
Risks & Assumptions
Data Source: Bloomberg
Arun Leslie John
Chief Market Analyst
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