Signal du Jour - long vol in BOIL

Wait, weren't we short 10 days ago?

A week ago, we wrote about shorting volatility in BOIL. We won’t lie—we took that trade a little earlier in the Discord Channel before posting about it in the newsletter. That allowed our members to profit nicely before the weekend and yesterday.

A side note: We really don’t like bragging about PnL in a research publication. We feel it is disingenuous and sensationalist, but once in a while, you have to. Especially because the biggest feedback we’ve received from our esteemed readership is to talk more often about the results. Take this as a first step in that direction. Also, what we do here is fairly public, and many of our results are available via the API. Finally, the Discord Channel is also a paid community; contact us for further details.

That said, because we aim to become a serious trading publication, we felt we had to write about BOIL again today, and this time on the long side.

Now, trading the long side of volatility is obviously harder, and the win rate is not as good as the short side of volatility. It doesn’t mean the results are less good, just harder. However, what matters is the variance risk premium. If we have a long volatility signal, it usually means that the variance risk premium has disappeared, and at the very least, we should take that as a sign to exit the current short trade.

Let’s dig into it.

The context

As a quick reminder, BOIL is an ETP that gives investors exposure to natural gas. Its particularity is that it is leveraged by a factor of three. Needless to say, the swings in this product are usually wild, and as one of our members reminded us, “You always have to keep an eye on BOIL.”

A glance at the stock path over the last month shows some pretty wild swings between a low of 16 and a high of almost 50% above. If we asked kids, they might think it’s a meme stock or an altcoin.

As one would expect, the realized volatility has been quite stressed recently, and the term structure is inverted.

The realized volatility term structure is the highest it’s been in over a year.

Interestingly, in the signal last week, we focused on the expiration on 6/28 and sold implied volatility of roughly 100. This was because the VRP was particularly stretched in that tenure. Looking at this chart, we can see that the realized volatility over a week is still way below that threshold.

Considering that BOIL hasn’t started a crazy trend that could challenge straddle boundaries, this was, overall, a good trade.

What happens now? Are the options data still telling the same story?

Let’s have a look.

The signal and the trade methodology

Let us preface this again with a couple of reminders. A long volatility trade doesn’t mean something completely crazy is going to happen. The premise behind them is very similar to short volatility trades—you are trying to identify cheap options relative to the current risk (or movement) observed in the market.