August 26, 2009
By:  Matthew Bradbard

The way I explain this trade is that a ratio has gotten out of line and we are looking for it to get back in line. That does not mean back to 8:1 or even 10:1 (which has been the norm) but at least a reversion closer to the mean. As of this moment the October spread is 22:1, November 17:1 and December at 15:1. We would suggest allocating approximately $5000 per strategy getting short crude and long Natural gas for the month of December. Regardless of the individual legs, if the market does what we would like it to do (there are no guarantees the market will do this) we would then advise liquidating at $8000, a net profit of $3000 less commissions and fees. We are not certain if you will potentially profit in Crude oil or Natural gas nor do we care for this particular tactic. Find 3 charts below: Crude oil, natural gas, and an overlay of the ratio. This trade has 84 days time. We suggest buying a December $10 bear put spread in crude oil; the $70/60 is trading at $3000. We suggest buying a December $1 bull call spread in natural gas; the $6/7 is trading $1800.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial.  Past performance is no guarantee of future trading results.

Crude Oil

Natural Gas

Crude Oil:Natural Gas Overlay