Is there an efficient way to create upside exposure to platinum group metals?

Is there an efficient way to create upside exposure to platinum group metals?

by Hari P Krishnan

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.

A graph of historical front month futures prices, palladium (edited)
Figure 1: Historical front month futures prices, palladium

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.

Shows the relative performance of palladium call spread and rolling palladium futures strategy
Figure 2: Relative performance of palladium call spread and rolling palladium futures strategy

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.


About the author

Hari P Krishnan
Hari P Krishnan

Hari P Krishnan has 25 years’ experience in financial markets, with over two decades as a portfolio manager. Formerly a PM at Doherty Advisors in New York, a fund manager at CrossBorder Capital in London, and an Executive Director at Morgan Stanley, he now manages or advises separately managed accounts at SCT Capital in New York.

Hari is the author of The Second Leg Down on regime-based hedging, and lead author of Market Tremors: Quantifying structural risks in modern financial markets. He holds a BA in maths from Columbia University, a PhD in Applied Math from Brown University and was a Postdoctoral Research Scientist at the Columbia Earth Institute.