Back of Curve

Posted on by William Griswold

Good Morning,

As promised, today we’ll take a look at a few opportunities in the back-end. For this exercise, we’ll deploy Ansergy’s “APT” tool set. APT ranks 388 derivatives against each other using various weights based on several factors, including:

  • Market’s relative position over the last nine months
  • Forecast’s relative position over the last nine months
  • Volatility of the market vs. forecast
  • Most recent price action
  • Liquidity of the product
  • other, call if you want to discuss

The above is a snapshot of the APT summary table. We’ve created bookmarks and dashboards that split these by derivative and hour type; you may also want to create your own dashboards by hub. For this exercise, we’ll assume perfect liquidity, though we know that isn’t the case.

Outrights – Monthly

As noted yesterday, APT does not utilize BOM or Prompt since it is a fade strategy which can be problematic in those more fundamentally driven tenures.

Rarely will we see anything overly compelling in the monthly outrights, most of the best trades in this group are in BOM or Prompt. That said, the PV HL Dec caught our eye:

The market has bounced off a contract low and remains cheap while the forecast has moved up. Liquidity might be an issue, plus this looks less compelling from a heat rate perspective. Still, it was the best monthly outright. Note the ranks in the onpeak were all 100+, that is a clue there aren’t a lot of compelling charts.

  • BUY PV Dec HL

There were no Off Peak Monthly’s that met our screens.

Outrights – Quarters

The quarterlies have several attractive opportunities:

The market rallied the Q3 18 off of Palo’s bullish June-July cash – dumb, huh? This is a strong short rec given the blunder has begun its reversal.

  • Short Q318 PV HL

Maybe not as compelling as the previous product, but the Q4 18 MidC HL has been flagged as a buy given that it’s trading near a contract low (and bounced a bit off of the low) and the forecast delta is near an all time high (excluding the psychosis from last fall driven by WA’s failed carbon tax initiative).

  • BUY Q418 MidC HL

Like the MidC we just discussed, the Q1 19 SP off-peak is at its contract low while the forecast is moving up and the delta widening. This Qs pain is derived from the weak Q1 17 cash; does that mean all Q1s will suck forever? We don’t think so, and we will…

  • BUY Q1 19 SP15 LL

ON|Off Derivatives

There are a few juicy ones in here, though putting these on might be problematic.

The market has beaten the Nov on/off to a pulp and now its a must own. The fear in this trade is that cash might continue to tighten off of declining inflows and put additional pressure on the strip, so maybe wait for a lower price if you are of the timid class of trader, we aren’t, so we are going to  …

  • Buy MidC Nov On|Off

This product, Sep MidC On|Off is a bit closer in so probably easier to execute. Similar story, near contract lows though it is still trading slightly above the forecast. I’d do the Nov over the Sep, but would still be comfortable putting this on. Bear in mind; the spill ends on Aug 31 which will pound the LL more than the HL.

  • Buy MidC Sep On|Off

Sorry for obsessing over the MidC on these on|offs, but the model likes them and you, the market, has hated them, which is why the model loves them. Maybe rather than doing the Nov, just do the whole damn Q?

  • Buy MidC Q417 On|Off

Here you go, a non-MidC on|off; this one is Q1 18 NP15. Not quite so sweet as the MidC, but it’s near contract lows making it a low-risk entry point. We’d be quick to take small profits here as this product has been range-bound since Spring.

  • Buy NP15 Q1-18 On|Off

Period Rolls – Months

Like the on|offs, there are a few rolls that jump out, though most are Qs …

That’s a sick chart, the NP15 HL Dec-Nov. Either these are just whacked marks or this is the buy of the year, though it’s a case of catch the falling knife. We have gloves and are grasping for the blade …

  • Buy NP15 HL Dec-Nov Roll

That was the only monthly roll we liked; there are more Qs …

The Market hates the four relative to the 3 and now has over-sold the 4; we’d fade that all day long. Not sure why Q4 18 is everyone’s red-headed step child, we kind of like it, especially since there isn’t anyone, aside from God, who has a clue about the 2018 water year.

  • Buy MidC HL Q418-Q318 Roll

Here’s another case of taking last year’s cash and projecting onto next year … fade that blunder all day long.

  • Short PV HL Q218-Q118 roll

Can’t trade PV? Do it at SP, the same opportunity.

    • Short SP15 HL Q218-Q118 roll

Want to buy a roll? Check out the NP15 off-peak Q118-Q417; it’s kind of cheap. This would be a good trade for the daily guy that was just given a term book and wants to do his first Q. You get to play big boy, and you’ll probably make a buck.

  • Buy Q118-Q417 roll

The Spreads

I’ll not bore you with the summaries; those are all in the Ansergy Dashboards, look for yourself. You can also launch the TradeRanks from the summaries by clicking the URL icons.

Wow, the market loves SP and hates PV, that’s a turn from what we saw a few weeks back. With a bit warmer forecast at Phoenix today it might be a good time to fade those sentiments …

  • Short SP-PV Sep HL spread

Can’t trade SP-PV, do the same with the NP-MidC. The market loves the NP and is blase about MidC which is easy to understand after a solid water year, but CA had one, too. If anything, the MidC is shedding its water faster than NP so we can’t see the fundamental reason why the spread has blown out of late, and we will, consequently,

  • Short NP-MidC Sep HL spread

Pretty much the same trade as the NP-MidC, just Oct, and OffPeak in this case. Again, the market has blown out the spread; now it is at or near the contract high, probably all driven off of last week’s robust cash. Fade that nonsense. If it’s water that is pushing this we’d suggest you recheck your math; the MidC won’t have a water anomaly in October if anything it will be a negative anomaly. Perhaps the market remembers those biblical rains the Northwest enjoyed in the latter third of October last year? Don’t count on seeing that much water in Oct for another decade.

  • Short SP-MidC Oct LL spread

This trade, the NP-MidC Q4 17 HL, is the same story as the Oct LL we just discussed. The market has rallied this to contract highs; we’d rather see a pullback before we jump in, but just put on gloves and catch the rising knife.

  • Short NP-MidC Q4 2017 HL spread

There are plenty more nuggets in them thar hills; these are just a few that we panned out. Over the next week or two, we’ll take APT out of Beta, but we’ll continue with these term expositions once a week.

Ciao,

Mike