earn on storage cost

[trade4succes]

Assume you had the possibility to 50% of the time manage to pick a winning trade, and the other 50% of the times a losing trade, for same profit/loss. All of the trades would be short, and in Energy futures, or any future in a commodity that would have a storage cost in the premium over spot. (future price theoretically is spot + interest rate + storage cost).

Would you be able to on average make money, as you would only short and you would earn all the storage costs, which vanish into thin air anyway?
(Of course sometimes you would lose big, I am assuming here you would have the possibility to make 50% good 50% losing trades, as when it comes to predicting the cash prices. I am also assuming interest rate is equal to the inflation pushing up the commodity).

What do you think?

 

[nazzdack]

Quote from trade4succes:
----All of the trades would be short, and in Energy futures, or any future in a commodity that would have a storage cost in the premium over spot.
----Would you be able to on average make money, as you would only short and you would earn all the storage costs, which vanish into thin air anyway?
----sometimes you would lose big....
----I am assuming here you would have the possibility to make 50% good 50% losing trades....
----What do you think?

1) You have to take into account that the "average daily storage fee" is very small with respect to the "average daily price volatility" of the market you're trading. Crude oil may appear to lose ~2 cents per day but it can have a daily range of more than 100 cents per day.
2) The market can rally with the storage charges remaining and possibly getting larger.
3) You could have oil in storage and then hedge but there's still no guarantee of earning "free money" on the trade.
4) What you're considering can work well if crude oil declines but you're making your "big" money from price fluctuation, not premium decay.

 

[TraderZones]

Quote from trade4succes:

Assume you had the possibility to 50% of the time manage to pick a winning trade, and the other 50% of the times a losing trade, for same profit/loss. All of the trades would be short, and in Energy futures, or any future in a commodity that would have a storage cost in the premium over spot. (future price theoretically is spot + interest rate + storage cost).

Would you be able to on average make money, as you would only short and you would earn all the storage costs, which vanish into thin air anyway?
(Of course sometimes you would lose big, I am assuming here you would have the possibility to make 50% good 50% losing trades, as when it comes to predicting the cash prices. I am also assuming interest rate is equal to the inflation pushing up the commodity).

What do you think?

You are fighting inflation, which over time, tends to push prices of the underlying up. I do not understand about your comment about interest rates=inflation. For example, petroleum products, stocks, metals, and other things are generally much higher in price than they were 30-40 years ago. Being short would not have made you money.

If there were an easy way to make money like this, then Goldman, Morgan-Stanley and the other bigs would have arbed/drained it dry.

 

[ogarbitrage]

Quote from trade4succes:

Assume ....assuming....assuming....

What do you think?

Sold.

 

[SomeYoungGuy]

And sometimes the market can go upside down, inside out, backwards, reverse, or any other direction than you could possibly imagine.

To arb, you'd better be extremely well capitalized and have in-depth knowledge of your underlyings.

Being a newbie myself, I would have said you're crazy if you tried to tell me this could happen:

http://knowledgeproblem.com/2009/02/01/contango-and-storage-arbitrage/

But now that it has, it's totally logical.