Correlation: WTI crude and S&P 500

Thanks for your feedback again Bone.

While I appreciate that you may be correct, I'm fairly happy with my airline thesis. Also I freely admit that I don't understand every financial instrument / relationship out there; I'm much happier to adhere to the "don't trade things you don't know" rule.

For what it's worth I established small starter short positions in the airlines today, to replace a short S&P 500 position that I had for a different pair trade.

Short: RJET, JBLU, LCC, AMR, DAL.

For comparison purposes only, I am short the FAA (airline ETF) at the low of day of 39.50, and long ES at high of day at 1254.75. (My executions for both legs were different to this).

For future comparison: 1254.75 / 39.50 = 31.76

I'll look to add on either of the two following situations:

(1) airlines strong versus S&P 500 or
(2) airlines demonstrate stronger intraday sensitivity (price declines) if oil rises.

Let's see how this goes in the coming months and years.



Quote from bone:

The missing piece which takes things to the next level is that there are are other instruments outside the equity and energy spaces that have very high frequency intraday and daily close correlations to the S&P 500. No one correlator is perfect, but if you can model a basket the effects and benefits are more consistent.

For proprietary (contractual NDA) reasons, I can't specify the specific instruments, but they do exist and they are indeed used as a trading edge on the S&P 500.
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M22, you are definitely on the right track - relative value trading with a "boosted correlator edge".

Suggestion:

Buy ATM SPY calls and Sell ATM airline/airline ETF calls? It is a delta and premium-neutral spread for the most part, you are selling off the theta (time) component, and if your hunch is correct you will get a nice volatility (gamma) kicker as a bonus pay-off.
 
Thanks again for your feedback Bone.

Your idea sounds great, and I appreciate the suggestion.

However my initial concern (without looking into it in greater detail) is that the spreads on airline / airline ETF calls might be too wide for my liking. This wide spread relates both to the initial premium received, and also the ease at which I can liquidate the position at a later date, if I want to close the trade for any reason.

Also there might not be the same 'range" of strike prices available that one could find for SPY or ES.


Quote from bone:

M22, you are definitely on the right track - relative value trading with a "boosted correlator edge".

Suggestion:

Buy ATM SPY calls and Sell ATM airline/airline ETF calls? It is a delta and premium-neutral spread for the most part, you are selling off the theta (time) component, and if your hunch is correct you will get a nice volatility (gamma) kicker as a bonus pay-off.
More...
 
Good morning airline investors from Ben Bernanke:

ES up 0.60% or so, at about 1261.50
CL up 0.80% or so, at about $92.08

If the ES and CL remain at roughly these prices at 9.30am, this should be an interesting litmus test for the airline stocks as a whole.

Will they open up along with the ES? Or flat to down because of rising CL?

I noted with great interest that in the session of 31 December, the $XAL had a 1% decline between 10am and 2pm, which correlated with oil going from $89 to $92. This was most noticeable for JBLU, LCC and UAL.
 
A bad earnings report from DAL sends airline stocks lower today.

In approximate order of weakest to strongest (on a multi-week and multi-month timeframe)

DAL is the 'leader' on the downside, reaching levels not seen since October, and doing this on heavy volume.

RJET noticeably weak in recent days, after doing a secondary offering of 12 million shares at a price of $7.80 per share on 11 November.

UAL is a bit more volatile than DAL, but also relatively weak.

LCC is even more volatile, and from my reading, is the only large airline without fuel hedging in place.

JBLU is much less volatile, but not as strong as other stocks listed below.

SKYW was strong in late 2010, but in 2011 has been finding it difficult to outperform.

AMR is relatively strong.

LUV is not very volatile, and relatively strong.

ALK is probably the strongest of the airline stocks listed in this post, and from my reading I understand that it has hedged its fuel exposure well.
 
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