Loding Loading ...
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved

Thursday, August 20, 2020

Gasoline - Low Sulphur Gasoil Pair Trade

by Century Financial in Investment Insights

Gasoline - Low Sulphur Gasoil Pair Trade
Low Sulphur Gasoil Pair Trade

*This performance is only observed with historical back-tests and not traded by the company.

Gasoline and Low Sulphur Gasoil have had a strong correlation historically, but an interesting fact to note is that on a month on month basis Gasoline has outperformed Low Sulphur Gasoil between the period of September-December in 7 out of the last 10 years with the average return being 6.8%. The maximum gain has been 30% while the maximum loss has been -12%.

Back-test Results for past 10 years based on monthly opening and closing prices

Low Sulphur Gasoil Pair Trade
Low Sulphur Gasoil Pair Trade
September-December performance (Generic Contract)
2010 16%
2011 3%
2012 22%
2013 1%
2014 -1%
2015 30%
2016 10%
2017 -12%
2018 -5%
2019 5%
Sum 68%
Average 6.8%
Hit ratio 70.0%

Besides, since the two instruments have a strong correlation of +70%, when there is a huge deviation in the ratio from the historical average, the pair trade strategy gives an entry signal and when the ratio returns to the average, the strategy gives an exit signal. Back-tested results based on the above strategy exhibit total profit of +$180K in the past 10.5 years considering equal exposure of $100K in each instrument.

However, it is important to note that trading pairs is not a risk-free strategy. The difficulty comes when prices of the two securities move contrary to the positions taken resulting in losses. Thus, it is important to adhere to strict risk management rules when dealing with such adverse situations.

Currently, the Gasoline-Low Sulphur Gasoil Pair trade is giving a buy signal (Buy Gasoline, Sell Low Sulphur) expecting the ratio to increase further. The current ratio is 0.3409 and the highest in the last 5 years was 0.413 while the lowest was 0.191 on a weekly closing basis. The low was made in March 2020 when the pandemic created havoc in the financial markets. Technical charts also suggest the ratio could increase from these levels.

Gasoline ā€“ Low Sulphur Gasoil Ratio Chart

Low Sulphur Gasoil Pair Trade
Back-tested Results for past 10 years
Gasoline ā€“ Low Sulphur Gasoil
Investment $100,000
Exposure to each instrument $100,000
No of Trades 91
P/L in 10.5 years $188,247
Profit % 188%
Max Drawdown -$41,909
Hit Ratio 60%

Risks & Assumptions

icon
The strategy might suffer from look-ahead bias which occurs due to use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
icon
Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
icon
Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
icon
The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
icon
Drawdowns in actual trading can be higher than the tested system and loses could significant in the event of leverage.
icon
Unforeseen events can lead to variation in performance from the tested trading strategy.
icon
The tested result has been computed with price feeds available from Bloomberg.
icon
The testing environment has not considered transaction or any other costs.
icon
Trading indicators used for the purpose of testing has been provided by Bloomberg.
icon
The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data Source: Bloomberg

Arun Leslie John
Chief Market Analyst

Disclaimer: Century Financial Consultancy LLC (ā€œCFCā€) is Limited Liability Company incorporated under the Laws of UAE and is duly licensed and regulated by the Emirates Securities and Commodities Authority of UAE (SCA). This document is a marketing material and is for informational purposes only and must not be construed to be an advice to invest or otherwise in any investment or financial product. CFC does not guarantee as to adequacy, accuracy, completeness or reliability of any information or data contained herein and under no circumstances whatsoever none of such information or data be construed as an advice or trading strategy or recommendation to deal (Buy/Sell) in any investment or financial product. CFC is not responsible or liable for any result, gain or loss, based on this information, in whole or in part.

PLEASE READ THE FOLLOWING TERMS AND CONDITIONS OF ACCESS FOR THE PUBLICATION BEFORE THE USE THEREOF.

By use of the publication and continuing to access the publication, you accept these terms and conditions and undertake to be bound by the acceptance. CFC reserves the right to amend, remove, or add to the publication and Disclaimer at any time without any prior notice to you. Such modifications shall be effective immediately. Accordingly, please continue to review this Disclaimer whenever accessing, or using the publication. Your access of, and use of the publication, after modifications to the Disclaimer will constitute your acceptance of the terms and conditions of use of the publication, as modified. If, at any time, you do not wish to accept the content of this Disclaimer, you may not access, or use the publication. Any terms and conditions proposed by you which are in addition to or which conflict with this Disclaimer are expressly rejected by CFC and shall be of no force or effect.

No information as given herein by CFC in this publication should be construed as an offer, recommendation or solicitation to purchase or dispose of any securities/financial instruments/products or to enter in any transaction or adopt any hedging, trading or investment strategy. Neither this publication nor anything contained herein shall form the basis of any contract or commitment whatsoever. Distribution of this publication does not oblige CFC to enter into any transaction.

The content of this publication should not be considered legal, regulatory, credit, tax or accounting advice. Anyone proposing to rely on or use the information contained in the publication should independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professionals or experts regarding information contained in this publication. CFC cannot be held responsible for the impact of any transactional costs or any taxes as may be applicable on transactions.

Information contained herein is based on various sources, including but not limited to public information, annual reports and statistical data that CFC considers reliable. However, CFC makes no representation or warranty as to the accuracy or completeness of any report or statistical data made in or in connection with this publication and accepts no responsibility whatsoever for any loss or damage caused by any act or omission taken as a result of the information contained in this publication. The report does not take into account the investment objectives, financial situations and specific needs of recipients. The recipient of this publication must make its own independent decisions regarding whether this communication and any securities or financial instruments mentioned herein, is appropriate in the light of its existing portfolio holdings and/or investment needs.

This document is a marketing material and has been prepared by individual(s), marketing and/or research personnel of CFC. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is purely a marketing communication. In this publication, any opinions, news, research, analysis, prices, or other information constitute is a general market commentary, and do not constitute the opinion or advice of CFC or any form of personal or investment advice. CFC neither endorses nor guarantees offerings of third party, nor is CFC responsible for the content, veracity or opinions of third-party speakers, presenters, participants or providers. CFC will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

Charts, graphs and related data or information provided in this publication are intended to serve for illustrative purposes only. The information contained in this publication is prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors relevant to their determination. All statements as to future matters are not guaranteed to be accurate. CFC expressly disclaims any obligation to update or revise any forward-looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events.

Staff members/employees of CFC may provide/present oral or written market commentary or analysis to you that reflect opinions that are contrary to the opinions expressed in this research and may contain insights and reports that are inconsistent with the views expressed in this publication. Neither CFC nor any of its affiliates, group companies, directors, employees, agents or representatives assume any liability nor shall they be made liable for any damages whether direct, indirect, special or consequential including loss of revenue or profits that may arise from or in connection with the use of the information provided in this publication.

Information or data provided by means in this publication may have many inherent limitations, like module errors or lack accuracy in its historical data. Data included in the publication may rely on models that do not reflect or take into account all potentially significant factors such as market risk, liquidity risk, credit risk etc.

The use of our information, products and services should be on your own due diligence and you agree that CFC is not liable for any failure to achieve desired return on investment that is in any manner related to availing of services or products of CFC and use of our information, products and services. You acknowledge and agree that past investment performance is not indicative of the future performance results of any investment and that the information contained herein is not to be used as an indication for the future performance of any investment activity.

This publication is being furnished to you solely for your information and neither it nor any part of it may be used, forwarded, disclosed, distributed or delivered to anyone else. You may not copy, reproduce, display, modify or create derivative works from any data or information contained in this publication.

Services offered by CFC include products that are traded on margin and can result in losses that exceed deposits. Before deciding to trade on margin products, you should consider your investment objectives, risk tolerance and your level of experience on these products. Trading with leverage carries significant risk of losses and as such margin products are not suitable for every investor and you should ensure that you understand the risks involved and should seek independent advice from professionals or experts if necessary.

trade-talks
brainy-bull
mental-funda
wow
get-started