Wednesday, January 19, 2011

VLO and refining margins

As an additional hedge to the 3-way arb described in my earlier post Brent/WTI spread very wide, because the short long-dated WTI futures is overweighted in that arb, while RBOB (gasoline) futures are in backwardation, which would indicate further strength in gasoline, all other things being equal, you might want to buy VLO, the cheapest refiner fundamentally, with a great chart to boot, as an additional hedge to the previous trade.

Essentially, the trade as it stands now is a 4-way arb where every part of the trade has positive expectation of profit on its own, but hedges other parts of the trade nearly perfectly.  The legs of the trade are:

Long 1 unit Mar WTI
Short 1 unit Mar Brent
Short 1 unit Dec WTI
Long 1 unit Dec Brent
Short 1 unit either Dec or Jun WTI
Short 1 unit Feb VIX
Short 1 unit Mar VIX
Long some VLO, offsetting the short Dec/Jun WTI

This should essentially make you net flat risk aversion.  I'm currently in every leg of this trade.