A lot of people follow the commodity markets. Most have a favorite contract that they trade or chart. Some will follow a particular sector like grains, currencies or interest rate futures.  As active as some people’s interest is in commodity markets, they may only have a tunnel vision for one particular contract. It seems like no matter what contract people focus on, they always know the price of crude oil.

After seeing crude oil trend lower since November, the market is now trading higher than where we started the year off. Many are wondering if the “bottom” is in after trading briefly below $43.00 in mid March. Since then, crude has moved up $15.00, but it hasn’t been a straight line. The only thing that has been consistent over the last few months is the volatility.

Recent data tells us that the Cushing, OK storage facility is near 80% capacity, the highest level in nearly four years. Domestically we are producing as much as we have in three decades, and the global production is continuing at a steady pace. Even with the recent moves above $55.00, I think we will see a pull back towards $50.00 a barrel.

The Trade

  • In a shorter term bearish play I like buying the June crude 53-51 put spread at 30 points ($300.00) or better.
  • The maximum value on the spread at expiration (05/19/15) is 300 points ($3000.00) with both strikes in the money.
  • I am setting a preliminary exit target at 100 points.
  • We are long premium in this trade and risk is defined to the cost of entry plus fees and commissions.

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For those interested in a free grain webinar with Tim Hannagan each Thursday at 3:00 PM central time, please click here.

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.