Market Neutral Spread

Long 3*Natural Gas & Short 2*Crude Oil

Big Picture

• MCX Energy Index is trading between monthly pivot and weekly pivot 4422-4383

• 2*CL-3*NG Spread is trending down since 14th September 2013

Intraday Fundamentals

• Trade volumes were expected to remain light on Monday, with Nymex floor trading remaining closed for the U.S. President’s Day holiday.

• Speculation that this week’s supply data will show a larger-than-average drawdown in supplies also lent support. Early withdrawal estimates range from 212 billion cubic feet to 240 billion cubic feet.

• Data from the Commodities Futures Trading Commission released Friday showed that hedge funds and money managers increased their bullish bets in natural gas futures in the week ending February 11.Net longs totaled 163,943 contracts, up 7.6% from net longs of 151,338 in the previous week.

Trade Management

• I bid for long leg (natural gas) at 336.9 and simultaneously offered short leg (crude oil) at 6240

• Static Hedge Ratio@ Entry Price so that we are as close to market neutral as possible.

• (624000/421125) = 1.48 approx i.e. For 1 lot long of CL we need to short 1.48 equivalent lots of NG.

• This position had Net Long Exposure of +15375 per unit (3*NG-2*CL value is 1 unit)

• I bid for the short leg at 6232 and offered long leg at 337.6

Intuition

• NO

Review

• Trade volumes were expected to remain light on Monday, with Nymex floor trading remaining closed for the U.S. President’s Day holiday.

• I traded light on account of above mentioned factor which is a good thing. • I panicked and lowered my offer 3 ticks for the short leg during initiation to

become as market neutral as possible as I can however I was still mildly net long in exposure

• I could have used my tape reading skill to bid for the long leg at lower price but I entered as per my trigger.

• This trade unfolded over 4.5 hours • I did a good job of exiting the trade by bidding and offering as I saved on the

spreads, considering US is closed i didn’t try to trade again • Overall I am satisfied with the trade process however I need to develop more

patience and not let each tick freak me out • The challenge is to isolate such trades from outrights , I was treating this trade as

outright by checking ticks every minute • Need to listen to music or focus my attention on breathing exercises • I CAN IMPROVE EVERYDAY