Is there an efficient way to create upside exposure to platinum group metals?
Testing the Allasso assets engine with a focus on palladium
Following Goehring & Rozencwajg Associates, LLC, hybrid cars can be more net efficient than EVs and gas-powered vehicles.
With this in mind, we can imagine a future where hybrids capture a significant percentage of market share. Significantly, hybrids require slightly more platinum and/or palladium than traditional gas-powered cars.
The margin of safety, and a twist
The market may be discounting an increase in hybrids, as 𝗙𝗶𝗴𝘂𝗿𝗲 𝟭 suggests.
An asset that's cheap, but no longer falling sharply, tends to be ignored by specs and other market agents. Statistically, these forgotten assets are right skewed: the probability of a large price increase outweighs the odds of an equal sized decline.
"The probability of a large price increase outweighs the odds of an equal sized decline"
We’re suggesting here that commodities are best bought with a “margin of safety”. But there’s a twist. Can we construct an options structure that participates substantially on the upside, with lower risk than a rolling futures strategy?
𝗙𝗶𝗴𝘂𝗿𝗲 𝟮 is from the Allasso/assets engine and shows the relative performance of a palladium call spread and rolling palladium futures. The blue line tracks the P&L of a long 40 delta/20 delta call spread over time. We roll with 30 days to maturity into the next available calendar month, and observe significant up capture during rallies, with less pain during gut-wrenching reversals.
The palladium call skew has historically been steeper than justified by underlying moves, even in a strongly trending market.
It’s not all that common to see a long options position outperform the futures in a market that has made a long trip to nowhere, and we'll take it!
As always, this should not be taken as trading advice.
