To put it simply, I use a wide array of uncorrelated premiums. Each premium individually is as simple and reliable as possible, based on solid fundamental analysis. But unfortunately, it does not generate a large percentage of profitability.
Examples of trading premiums:
Return +9.1% CAGR, max drawdown 24.6%
I’d like to give you a more detailed history of my trading over the last 3 years with illustrations. Detailed profitability statistics can be found here.
There have been 3 major mistakes in a total of several dozen trades. They are all quite simple and very easy to avoid with enough experience. But I didn’t have that experience at the time : )
I used to not understand how it was possible to trade precious metals at all, except as part of a passive securities portfolio as an alternative allocation. But after studying it a bit, it turns out that there is one of the easiest trades in this market.
As we all know, price is determined by the balance of supply and demand. And in the case of precious metals, there is a huge imbalance in demand. This is because of the uneven distribution of holidays throughout the year. On holidays, people give each other gifts and jewelry flies off the shelves of jewelry stores. The jewelry business has a distinct seasonality and must protect the price of its production commodity supply by buying futures for precious metals.
The easiest trade in gasoline and energy carriers is generally based on seasonality from early February through May and is traded long.
Seasonality is based on the annual growth and decline cycle of the average car mileage in the United States. In other words, the average car mileage increases during the spring and summer months, and accordingly, gasoline consumption increases from winter to summer.
When I started trading futures a few years ago, I was obsessed with the idea of market neutrality. I was primarily trying to put together a portfolio that was as market neutral as possible. In practice, I faced the fact that complete market neutrality is, in principle, impossible to achieve due to the nature of non-stationarity in the market. I complained about this to my brilliant friend. He replied to me, “Why on earth do we need market neutrality when our only goal is to make money?”. After thinking about his words, I quickly began to understand what the point of the portfolio really is and what I should be doing. I was able to solve the task simply by combining the least correlated instruments with the maximum unit of return and forgetting about the beautiful abstraction of complete market neutrality. From that moment on, I’ve been on a roll.
The idea is quite simple. From March to October, the consumption of natural gas is minimal, so starting in the spring, natural gas stockpiling for the next fall begins. Then, from mid-autumn, the cycle of filling the storage ends and the cycle of extracting the stored natural gas begins. In the following chart you can see the dynamics of gas reserves based on data from the US Department of Energy.
