The markets have calmed down a bit from last week, but there is still a cloud of uncertainty hanging overhead. The equity markets have done quite a job of getting back most of the recent sell off. Last week the S&P 500 had a nearly 120 point range from Monday to Thursday, with a 50 point range on Thursday alone. The market closed up 30 points from the low on Thursday, which may have given investors a reason to continue the buying trend the next session. Friday’s session was a volatile day with another 50+ point range.  All the buying on Friday helped the market close higher, and stopped the bleeding that had gone on most of the week.

Crude Oil Action

Not to be outdone, crude oil joined in on the fun with some wild swings as well. Last week crude dipped below $80.00 a barrel briefly for the first time in over two years. It bounced nearly $4.00 from there before getting back to a bearish trend. Wednesday crude oil settled at $80.52 a barrel, the lowest level since June 2012.

Key Indicator

The price of crude is viewed as an economic indicator by many observers, but can have different interpretations. Some view it as an indicator that price drops on lower demand, signaling that the economy may be slumping. The other view is that lower crude prices translate to lower pump prices, which puts more money in consumers’ pockets to spend elsewhere.

Define Risk

My gut feeling is that crude will continue to decrease in price over the next few months and stabilize. I also know that even in a bear market it can have short term volatile moves to the upside. Rather than shorting crude in a futures position, I want to define risk by using an option strategy. I like buying the December Crude 78-76 put spread at 40 points ($400.00) or better.  Risk is limited to the cost of entry plus fees and commissions. This spread has a maximum value of $2000.00 if both strikes are in the money at expiration on November 20. I will be setting an early target exit at 100 points, and look to scale out every 20 points after that if trading multiple contracts.  If crude starts to rally, I would try and limit my loss to 25 points or less.

Webinar

For those interested Walsh Trading is holding our weekly grain webinar Thursday October 23 at 3 pm central time hosted by our Senior Grain analyst Tim Hannagan. Tim has been ranked #1 by Reuters and Bloomberg in 2011 and 2012 for his most accurate end of year price predictions for soybeans and corn. Registration is free and if you cannot attend live, a recording will be sent to your email upon signup.

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.