Brent/WTI spread very wide

Feb WTI crude contracts are now trading at a discount to Brent crude of between $6-7/barrel.  This is unsustainable longer term.  See http://www.bloomberg.com/apps/quote?ticker=CLCO1:IND for some charts of this.

At the same time, contango is widening on the WTI contract.  This is typically bearish for the whole term structure.

So while the Brent-WTI arb would dictate long Feb WTI, short Feb Brent, the contango situation would dictate short further out WTI (like the liquid Dec '11 contract).  So I may do a four-leg trade to reduce risk, reduce margin requirements, while increasing expected return even further: Long Feb WTI, short Dec WTI, short Feb Brent, long Dec Brent.

If you would like to incorporate a third trade idea into this trade, since the long Dec Brent future leg has no edge in and of itself, but was taken as a hedge to everything else, that leg can be replaced with other positions having an edge.  Specifically, as described in  Uptrending Equity: Volatility arb, the steep contango in VIX futures provides an edge.  Because short VIX futures is essentially a long equities market position, and because oil is strongly correlated with the equities market (due likely to the "borrowed currency" status of the USD in the currency carry trade, meaning the correlation is likely to remain high for as long as the interest rate on the USD remains low relative to other worldwide currencies; graphs of oil/SPY correlation and interest rates here: http://www.riskwatchdog.com/2010/08/12/oil-correlated-to-equities-risk-appetite/ and http://www.tradingeconomics.com/Economics/Interest-Rate.aspx?Symbol=USD), the long Dec Brent position could be replaced with short VIX futures.  You will have to figure out for yourself what the appropriate size for the substitute should be.  Naturally, this would use more margin and incur more risk, but would simply combine yet another successful strategy into the trade to eliminate the hedges from each corresponding trade that don't provide any natural hedge.  In other words, by combining the VIX strategy with the oil trade, I can eliminate the long Brent Dec crude position from the oil trade, and eliminate the short SPY or long SPY puts position from the VIX paired trade.

Will look for the Brent-WTI spread to begin converging to get in. 

Wheat contango and other ags

Prices of many ags continue ripping higher.  Any trend-following system would be long a bunch of them and raking it in lately.  In constrast, wheat is struggling to make any headway as the contango widens even further.  Stay short long-dated wheat futures and long other long-dated ag futures

XXV

A new inverse VIX ETN is coming out as posted about on VIX and More: XXV and the New VIX ETN Landscape and by Adam Warner at Too Err Is Blog-Human | Blog - Daily Options Report. Outside of roll-yield considerations, I disagree with their assessment that it might be a good long-term hold. This is due to one crucial detail regarding what Adam Warner considers to be the "index" by which the XXV performance is to be calculated. Mr. Warner seems to define the "index" as the performance of VXX, while I assume the "index" will be a more independent measure of VIX performance, without the rebalancing drag and management fee drag. So while Mr. Warner assumes that the relative underperformance of VXX over time will serve to enhance XXV's returns since XXV's performance will be calculated as the inverse of the index's, I believe that VXX's underperformance will not enhance XXV's returns at all.

I'm not saying that a strong contango in VIX futures won't help XXV's returns--it definitely still will. What I'm saying is that I believe XXV and VXX will both fluctuate around an ever-decreasing center of mass, due to rebalancing and fees, that will cause it to be a poor investment choice long term, like many other ETFs/ETNs. Again, to re-iterate, this is aside from roll yield considerations. Basically, over time, if you would like to buy XXV, the better choice will be to short VXX.

See my earlier post Uptrending Equity: Volatility arb to see how I'm profiting from the presently large VIX contango.

Volatility arb

There is a large contango in VIX futures. I'm arbing it by shorting Aug VIX and buying Sept SPY puts (since the Aug VIX is supposed to reflect the IVs of Sept options) at various strikes w/ IVs at around 22-24%. Over next week or 2, assuming the market doesn't move, Aug VIX should converge down to VIX index, while IVs on SPY options increase as they near expiration. If market moves up or down, the two sides of the pair offset each other. In fact, on the face of it, it appears that the net paired trade is long gamma, meaning that the pair together makes money the further the market moves away from the original price upon entry, assuming both sides of the trade were delta-hedged at the beginning (you will have to come up with an approximation for the delta of Aug VIX). This may lead one to want to sell calls on VIX instead of outright shorting it if you want to neutralize gamma. However, a short VIX position itself may be slightly negative gamma already, as there's a built-in floor to VIX as the market moves up, while VIX can scream much higher as the market falters. Thus, I think an outright short on VIX is adequate.

Alternatively, you short the VXX ETN, which is comprised of both Aug and Sept VIX futures, and buy corresponding weights of Sept and Oct SPY puts. As of July 22, the VXX fund has mostly Aug futures and is dumping some every day to buy Sept futures. http://www.ipathetn.com/VXX-weights.jsp. In fact, this may be preferable, as people are always trying to front-run these cumbersome ETFs/ETNs.