Medium term
Trade view / 18 March 2014 at 8:44 GMT

Emissions on the rise, but beware excessive size

Chief Investment Officer / ACIES Asset Management
Switzerland
Price target:
Market price:

Background

The emissions market can be a wild ride. Trading this is not for the faint hearted. It has a history of sudden volatility expansion, large intraday moves and it has no price flux limits. This makes for a market that can be both dangerous and very profitable. It can be a very intersting market to trade, but make sure you never take on excessive position sizes. 

In this relatively new market, we trade emission allowances from National Registries in accordance with the ICE Futures Europe Regulation. You don't really need to understand what that is, any more than you need to be able to operate a harvester to trade corn. It's all maths.

Over the long run, this market has a tendency to move down in price. This is largely due to the term structure itself. This, however, is more relevant for trend following style positions, and this idea is about a counter trend trade. Still, it's woth having a look at the long-term chart to get a feeling for where we are.

 

Weekly backadjusted emissions futures continuation

CFI

Source: CSI Data

The term structure tells you that we're looking at a contango style market, that's getting quite steep on the far right side. Note that there is little to no open interest until the December 2014 contract. The choice here is between trading December 2014 or December 2015. Both are valid targets, but for a short-term long I'd go with the Z4 (December 2014). The shorter-term horizon means you need the higher liquidity and the higher price of the Z5 (December 2015) means that you have a negative bias on that point, which you don't want in this case.

The point value for this market is 1'000 units.

Emissions term structure and open interest

Term structure

Source: Following the Trend  

Management and risk description

Enter a small long position in the December 2014 emissions. The ticker usually CFIZ4. Set the stop level and the two target levels as limit orders from the start. Let the trade ride until the limit orders take it out.

Parameters

Entry: Current price level is around EUR 6. Buy here.

Stop: Firm stop at EUR 5.44.

Target: Close half the position at 6.59 and the rest at 6.88.

Time horizon: Average holding period for this trading model is two weeks.

Back adjusted emissions futures continuation

CFI

Source: CSI Data

 

 

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Non-independent investment research
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