Author: Really Easy Trade

Is market neutrality really that important?

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.

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Seasonality of oil production

The easiest oil trade is based on the seasonality of oil production and refining from early October to early December and is sold short.

The first component of oil seasonality is associated with a decline in Atlantic hurricane activity. It’s very simple: storms disrupt tanker logistics and oil production on floating platforms. Statistically, this significantly increases the cost of oil production and transportation by tanker. Consequently, when hurricane activity subsides, oil production and transportation costs fall. As a result, oil prices fall.

The downturn in Atlantic hurricane activity begins in September, but the number of tropical storms is still very high throughout October. From the end of October, the number of hurricanes decreases significantly.

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Capitalization matters

Few people know it, but there’s a very simple way to beat the profitability of the main American index, the S&P500.

The key property of this index is that it consists of more than 90% stocks of companies with large and mega capitalizations. But another property is that the weight of companies in this index is proportional to their capitalization. That is, we have an index instrument whose capitalization is significantly skewed towards Mega Caps.

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