Last month’s bullish stance in oil
Last month’s bullish stance in oil
The oil market is probably best traded on paper by most, but for those hungry for the action, here are a few ideas on how to profit from the top.
The most volatile oil market in history has a silver lining… the ability to create attractive option spreads for those lucky enough to be on the sidelines when chaos struck last month. At the time of writing, support levels appear to hold on the daily charts, with the September contract standing out as more stable. For the past few weeks, the front month oil contracts have been dominated by wild speculation, algos and panicked/forced liquidations, while the back months have been a little less irrational.
September futures held trendline support and is experiencing moderately lower intraday volatility. As such, we like the idea of using September options to create a bare-leg bull call spread (details below).
Please note that risk below the short put strike is theoretically unlimited, so this strategy involves a high margin and risk tolerance.
ALTERNATIVE STRATEGIES
Thank goodness there are micro crude oil futures. Although small, they can still offer profit/loss potential with this type of volatility. A smaller, lower-margin, and less frantic way to play oil higher is to simply buy September micro crude futures around $93.00 in hopes of a resumption of the uptrend. To put risk in perspective, if the market falls to $75.00, the loss would be $1,800. If oil returns to $105, the profit is $1,200 (every dollar of price change is worth $100 to a trader).
SEPTEMBER CRUDE OIL BULL CALL SPREAD WITH A BARE LEG
BUY SEPTEMBER OIL $95 CALL
SELL SEPTEMBER OIL $105 CALL
SELL SEPTEMBER OIL $75 PUT
Total Cost = $0 (This spread can be done for roughly equal money before considering transaction costs)
These options expire on August 17, 128 days before expiration
profit margin = $9,600
risk = Unlimited under $75
Maximum profit = $10,000 before transaction costs (this assumes the trade is held to expiration, which is unlikely; a worthy target would be $5,000 to $6,000
Zaner360 Symbols:
OCLU22 C95, OCLU22 C105 AND OCLU22 P75
*There is a significant risk of loss when trading futures and options. There are no guarantees of speculation; Most people lose money trading commodities. Past performance is not a guide to future results.
*There is a significant risk of loss when trading futures and options.
Past performance is not a guide to future results
Due to time constraints and our fiduciary duty to put customers first, the charts provided in this newsletter may not reflect current session data.
The seasonality is already taken into account in the current prices, references to it are not indicative of future market movements.
**There is a significant risk of loss when trading futures and options.** These recommendations are an invitation to enter into derivatives transactions. All known news and events have already been factored into the price of the underlying derivatives discussed. From time to time persons associated with Zaner or its affiliates may hold positions in recommended and other derivatives. Past performance is not a guide to future results. The information and data in this report are from sources believed to be reliable. Their accuracy or completeness is not guaranteed. Any decision to buy or sell based on the opinions expressed in this report is the full responsibility of the person who authorized the transaction. Seasonal trends are made up of some of the more consistent seasonal trends in commodity futures that have occurred over the last 15 years or more. There are typically underlying, annually occurring circumstances that cause the futures markets to react in a similar manner during any given calendar year. While seasonal trends can potentially affect supply and demand for certain commodities, seasonal aspects of supply and demand have been factored into futures and options market prices. Even if a seasonal trend occurs in the future, it may not result in a profitable transaction as fees and timing of entry and liquidation can affect results. No representation is made that any account has made or will make any profit using these recommendations in the past. No assurance is made that price patterns will recur in the future.
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