I’ve always been a fan of fundamentals when it comes to trading. They are very important to me when it comes to decision making time when entering a position. I believe they tend to carry more weight when one is trading a commodity with a physical basis (gold, grains, oil, etc.).
When the fundamentals don’t match up with how a market is acting, I tend to check the technical side and see if there is a correlation. Often that is the case—rallies will fall short upon touching long term resistance, markets trading near support even though there may be shortage of the underlying commodity.
HEADLINES
Sometimes markets can be influenced by another factor—news headlines. We are seeing that a bit this week. The news coming out of Syria is grabbing everyone’s attention. Will the U.S. take military action? How will that possible action be perceived by other countries?
As we all know any news coming out of that region may cause a reaction in the crude oil markets. Syria is not a large exporter of oil, but any military action would bring concerns about the overall stability of the region. The recent tensions in Egypt have not cooled of much either. With these types of headlines, technicals and fundamentals take a back seat when it comes to market moves.
SUPPLY/DEMAND
The U.S. crude oil production is near a 30-year high. The overall world supply and production are meeting demand. That being said, this market has been trading with volatility to the upside. If the situation in Syria cools off we could see a return to prices near $100 a barrel.
AN OPTION STRANGLE
If you are thinking about trading news driven markets, I like to use an option strangle, buying a put and buying a call in the same calendar month. Right now I like buying November crude 130-90 strangle at 45 points ($450.00) or better. Risk is limited to the cost of entry plus fees and commissions. A strong move in either direction could see a pop in premium. The November contract expires on 10/17/13, so this trade has some time to develop.
ASSESS YOUR RISK
Big market move can grab everyone’s attention. They often happen quickly and sometimes at first glance without rhyme or reason. Be sure to assess your risk before entering a position. If you want to trade news driven markets make sure you are not relying on yesterday’s paper.
RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.
