in this game.. nice guys always finish last.. so call me a prick I don't care what you think because now you are down on your CL puts.. guess what.. you got filled immediately becasue your price was sooo high that the floor traders sold it immediatley and filled it!..oil rallied like 3 bucks since you bought your cl puts... I hope your trade works.. i think oil is a short.. and you are going about it the correct way with options...
The problem is the IB IV quotes, which are wrong. As you correctly suspected, IB is using the wrong expiration date - July 1. Using 25 days remaining you indeed get an IV of about 28% for the 134 calls. But if you go to http://www.nymex.com/lsco_opt_expira.aspx you will see that the expiration date for those options is June 17 2008, so they have only 11 days remaining, yielding an IV of about 44%. There is some legitimate confusion about this - if you go to http://www.nymex.com/LO_spec.aspx NYMEX says the last trading day is 3 days before expiration of the futures contract. That conflicts with their expiration date of 6/17. But I'm pretty sure there are 11 days remaining in that contract, not 25.
Also, I've been following crude options pretty closely, and it's been a very long time since they traded below 30%. 28% is just wrong.
The fund seems to be limited to the front months. It holds NYMEX futures and cash. The discount is a function of their cash holdings, so it does seem fungible. I doubt it can be locked profitably as it's lacking complexity. Don't use IB's implied vol data. Use time and sales to generate model values. You can trade straddles or synthetics [short/long calls(puts) x long/short spot-switch] but they're equivalent. No guarantee, but it looks like you'll need at least 300bp to meet expenses, but durations don't match. Vols tend to increase as time passes as vol tends to be bid to close as expiration approaches. Theta is an illusion. The skew on the CL switch vol is negative. Back months carry lower vols. The analogy holds when pricing very short durations. You can't arb a 30d series against a 15d. I'd look to stat-arb some otm calls for the fat skew if one contract's calls are trading at a ~700bp premium, but don't consider it a lock. I would trade a small-switch into the risk: Short USO 25d calls Long CL 25d calls Long 5d USO spot Short 5d CL spot The above would be synthetic straddle were you trading spot at 25d. The small switch helps with correlation risk.
Thanks for the reply. You are always teaching me new things, esp. your nomenclature. The prime lesson here is you need matching durations and 5-700bp of iv difference to make an arb worth it (since 300bp goes to expenses alone). btw, what do you mean by 'switch'? i assume substitution of an option leg for spot of equal delta (ie replace a put leg of straddle with short spot, or likewise call leg with long spot). By d, i assume you mean 'days', and since you are referring to doing this as a synthetic straddle, i assume you mean starting each leg delta neutral (ie if otm calls are trading at 20 delta, go short or long respective 20 delta). But you mention 5d spot versus 25d calls. So are you saying drop the spot legs after 5 days once the correlation risk has been isolated? That duration on the spot doesn't make sense to me (since spot doesn't expire). Do you also have to maintain delta neutrality as the price moves away from the entry point? (I assume that takes the correlation hedging component away though)
Sorry, a switch is a local's term for a futures time spread. I use it generically when referring to spot-spreads. D = delta. I wouldn't hedge it actively as it's not a gamma trading vehicle.
I have seen TV pundits recommend USO as a substitute for oil futures. I did a quick study and found situations where USO/QM correlation was actually negative for some periods. I am 90% sure it has to do with the roll. USO is a substitute for oil futures only if you don't mind tracking risk, which can be substantial. nitro
The correlation can be negative if spot is noisy and the net-change is well under one sigma. Obviously you're never going to see CL +200 and USO -200.
uso is going to give you the best correlation to CL futures that you can find ..in equities..hands down. A synthetic short of selling an ATM call and buying a ATM put is a worthwhile trade if you want to get short and cannot get the shares..which I could not... I don't know why I did not think of doing this myself on Friday ..but I didn't/ SOmeone on this site recommended it and kudos to them.. I will put trade on right at the open.. I did buy DUG friday at 27.77... nitro.. why not upload your study... i find it hard to believe the USo and Cl or Qm ever really get that out of line... otherwise ther woul dbe arbitrage opportunity which a computer would sniff out and quickly exploit bringing both contracts back in line... Longs getting nervous at these levels.. governmetn and everyone else is gettign pissed.. many funds do not want to get caught up in a 10 or 15 dollar drop.. I think they will lighten up slowly over the next few days.. wednesdays oil report may give them good reason to finally sell mass contracts