The weather in Chicago lately resembles the trend in crude oil; it just keeps dropping. As we have seen crude oil drop below $50 a barrel, the temperature here has broken 0 degrees, and is down to -30 degrees with the wind-chill. I’m a big fan of one of those trends, not so much a fan of the other.
There has been much debate lately on whether the lower prices in crude are good for the economy. Personally I think it’s a plus for most individuals in this country. The lower price of crude and the effect it has on the energy sector of the markets should not be overlooked, but I think the plusses outweigh the minuses.
OPEC has not given any sign that they plan to lower production in the near future. Domestically, we haven’t seen a slow down either, and U.S. production continues to hover near levels we haven’t seen in decades. Demand is still out there, but it doesn’t appear to be increasing. Part of that is due to more efficient habits, and much more efficient vehicles. If these factors continue to stay steady, I think crude still has more room to go to the downside.
I like a bearish play, buying the March Crude 44-42 put spread at 35 points ($350.00) or better. Expiration is on February 17th, so we have some time to stay in this trade. Full value of the spread is $2000.00, if both strikes are in the money at expiration. I am setting an initial exit target of 85 points. If you are trading multiple contracts, I would look to scale out in 20 point intervals. If we see a reversal in crude, I would look to try and limit a loss to 20 points.
Living in the Midwest nearly my entire left, you learn to prepare for the elements. I’m fortunate to have a fairly short commute in the outdoors, but I still have to dress like an Arctic Explorer every once in a while on the way to work. Sometimes the markets are like the weather, it can change at any time and you never know what you may get. I like to prepare for the markets as much as I can, ready to take advantage of moves, and have a risk strategy in place when I am wrong. I’d rather be a little overdressed than shivering in the cold.
#####
For more information from Walsh Trading, 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.
