RE:Oil up, Oil stocks down: Consider a pairs tradeFor those that are in on the pairs trade from last Thursday, we are already almost halfway there to the target gap fill.
The divergence spread between CNQ and WTI has moved from about 12% when we initiated the trade, and is now tightened to around 6%, depending where you draw your lines.
Although HOD has dropped by 0.5% as oil rose just slightly as it bounces it's head on the $90 ceiling, the CNQ Oct 62.50 calls are now up from $1.40 to over $3.40 now, more than double. I know I own the majority of the open interest for that strike and expiry, but I see a few others may have followed along.
There is still a substantial gap left to close, and the market will imminently bear witness as CNQ moves from 50% to 100% of free cash returned to shareholders as their net debt falls under the $10 billion threshold which should put some more fire under the stock.
But perhaps the wise thing to do is consider to take half off the table and book some profits.
Go buy the wife a Tesla, and when the gap fills completely returning to normal, sell the rest and buy another one for yourself.
As you roll around town in quiet bliss searching for an available charge point, you can then smile and say to yourself 'Oil did this'.
MC
MigraineCall wrote: The last few sessions have seen a brutal drop in Canadian oil stocks, while oil itself has increased and remained strong. OXY and DVN have taken a pounding but XOM and CVX are stable. The industry is not going anywhere, and is in the same shape as it was a couple weeks ago.
Run some chart comparisons to find which ones have been hit the most, having the largest divergences. These divergences tend to snap back.
SU is too strong.
The one I have my eye on is CNQ, vs WTI. A difference opened up of about 12%. CNQ has breached it's lower daily Bollinger band, which statistically only happens 5% of the time.
For a pairs trade, you can consider going long CNQ, and then short oil by buying HOD.
Can also be done easily with CNQ call options, and offset it with the leveraged inverse HOD fund.
Keep the quantities of each side the same magnitude so that the movements balance out, and take profits as they return to normal ratios.
Just a trade.