Usually, one doesn’t wait ’til the end of January to sing of auld lang syne but what the heck, I’ve been kinda busy this month.

I meant to take a look back at the heating oil/gasoline straddle examined back in October (“In Winter, Heating Oil’s Not So Hot”). You remember options and futures guru Larry McMillan playing the seasonality game by shorting heating oil and buying gasoline, don’t you?

Yes, he shorts heating oil heading into the dead chill of winter, relying upon history to repeat itself. More often than not, McMillan says, heating oil prices actually decline from October through December after dealers and consumers have laid in their winter stores. The long gasoline leg reduces the trade’s margin requirement more than anything else.

When we looked at the spread in October, heating oil commanded a 14 cent per gallon premium over gasoline. Shrinkage of the premium produces spread profits; a widening creates losses.

McMillan’s advice back then was to “buy gasoline and sell heating oil futures … [entering] in mid-October, or perhaps mid-November, then exit in early January.”

So, did history repeat itself? Well, yes and no. Let’s look at the “no” part first.

You could have placed spread to a nearly 18-cent premium at the opening on October 23. A month later, the spread widened to nearly 22 cents per gallon as heating oil rose at a faster clip than gasoline. Since every cent-per-gallon price tick represents an equity value of $420 (heating oil and gasoline contracts call for the delivery of 42,000 gallons, remember), the loss on the deal would have been $1,655.

Now, $1,655 doesn’t sound like much of a hit when one talks of futures. At least when speaking of outright futures positions. This is a spread, though, so margin requirements are lower. That magnifies gains and losses. The total requirement for the spread was only $400 back in October, making the month’s loss a whopping 414%. Ouch!

With losses of that magnitude, most money management systems would have ordered you out of the trade. Hanging on would be, to say the least, uncomfortable.

Your money management system would appear to have been vindicated a couple of weeks later. After a price swoon, the spread widened to nearly 24 cents per gallon as gasoline prices now took a deep dive. Spread loss would grow apace to $2,541, or 635%.

At this time, the “Bail!” message light would have been flashing on traders’ dashboards.

The truly faithful, though, would ultimately have their reward. But not until the new year. By January 2, the spread contracted below October levels. Barely. A gain of $286, or 71%, could have been snagged on that day’s close. Following that, spread narrowing took hold in earnest. By January 7, heating oil’s premium was whittled to little more than 9 cents, yielding a potential spread profit of $3,553, or 888%.

With that, Larry McMillan can claim to have successfully pointed his clients in the right direction. Shorting heating oil against gasoline from October through early January really worked. If investors hadn’t headed for the exits along the way, they got where McMillan wanted them to go. Traders, however, will likely remember this year’s oil spread more as fuel for Mr. Toad’s Wild Ride.

NYMEX Heating Oil (Feb ’08)