Seasonal energy window with a defined-risk call

The seasonalWindow and the abstentionRule

This case study writes a spring-to-summer energy calendar as one optionIncomeProcedure. The rules name a seasonalWindow, an oilServicesProxy, a definedRiskCall that sets prepaidRisk, and an abstentionRule for the other half of the year.

The case study treats mid-February through mid-July as the bullish crude-oil holding period for the seasonal signal. That interval is the seasonalWindow, the system holding period for the energy signal.

Mid-July through mid-February is described as typically weaker but not a reliably sized reverse trade. The procedure therefore uses an abstentionRule: a written instruction to stay flat in those complementary months instead of flipping short.

The oilServicesProxy and three risk controls

A listed oil-services fund is the chosen oilServicesProxy. It stands in for single stocks and for the raw commodity.

Risk control is specified as three alternatives: a diversified energy fund rather than single stocks, a shorter hold than a full-year commodity position, and options that cap loss at a known debit.

The 2016 mid-February to mid-July path on that proxy is documented as a rise from 22 to 30.

The definedRiskCall as prepaidRisk

The options case buys July 2017 35-strike calls on that fund at 2.89, or 289 dollars plus commissions. That cash outlay is prepaidRisk. It is both the cost of the position and the maximum loss if the fund falls.

Those purchased calls are the definedRiskCall: the debit is the entire loss if the oilServicesProxy fails to rise before expiry.

The payoff sketch states that if the fund reaches 42, those 35-strike calls would have 7.00 of exercise value, or 4.11 before commissions against the 2.89 debit.

What the cash-crude illustration recorded

In the 10-year weekly cash-crude illustration from 2006, the spring-summer window is recorded as down only once, bullish more than 90 percent of the time, and about a 15 percent average move.

The write-up states that repetition of the seasonal pattern is not guaranteed.

Editorial reading

Editorial interpretation: the teaching point is to test entry, exit, and abstention as one optionIncomeProcedure, with a dated call overlaid on the seasonal signal so the rules can be examined together.

Editorial interpretation: a shortCoveringScenario, in which buying and covering of shorts could enlarge the seasonal bounce, is an optional stretch case. It is not a required trigger for the procedure.