From the October 01, 2012 issue of Futures Magazine • Subscribe!

Exploiting crack spreads with options

An improved fit with the prices of Valero and Tesoro stocks is achieved by combining the equities with heating oil minus gasoline RBOB. The data in “Heating oil less gasoline” (below) are cumulative percentage changes, permitting a comparison of several different series having different absolute values. This shows the ability of heating oil to match equity price changes for the two companies, as well as the enhanced effect when gasoline is subtracted from heating oil price changes.

“Cumulative percentage changes” (below) combines the three crack spread variables — crude oil, heating oil and gasoline — and shows that they all are correlated positively with the Valero equity series. Near June 1, 2012, Valero’s stock price is seen leading the other variables as energy futures increase toward mid-July. Although the crude oil price also is increasing, heating oil and gasoline are climbing faster, improving the crack spread and supporting the higher stock price.

The comparative volatility of energy equities is expressed again on “Energy call options” (below). Valero and Tesoro have the two highest call price curves, while the components of crack spreads are in the middle. Chevron, one of the largest integrated energy companies with products in all segments of the petroleum and natural gas industries, has the lowest volatility. 

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