Six weeks ago I made a trade recommendation that called for a long bull call position in crude oil which entailed buying the August 103 call and selling the August 107 call for a price of 45 cents which in dollar value would have cost $450.00 plus commissions and fees. Crude oil at the time was trading just above $96.00 a barrel.
After I published the article, crude oil promptly sold off $4.00 dollars which immediately devalued the spreads cost to about 15 cents. As they say, timing is everything.
However in the last few weeks, we have seen the price of crude oil surge, past $105.00 a barrel, as of this writing. Those who took the aforementioned trade recommendation and held onto the trade would have possibly seen some handsome rewards.
Such is the life of a commodities trader.
FUNDAMENTAL FACTORS
The reasons for the possible spike in oil prices that I mentioned six weeks ago have in my opinion been the reason for the rally in crude prices in the last few weeks. Geopolitical tensions in Egypt, where the current government of Mohammed Morsi has been overrun and ousted have raised tensions in the region and stoked fears that the Suez Canal, a vital artery for the shipment of crude around the world may be shutdown.
Here in the U.S., we have seen significant drawdown’s in crude stocks in Cushing Oklahoma, only to lend credence that demand has picked up to due significant rises in the equity markets. Not even a rising U.S. dollar, which usually deters the rise in commodity prices like crude oil, hasn’t stymied crude’s advance. One of the talking heads on TV put it correctly yesterday saying “this market wants to trade higher”. In my opinion, he is correct. The crude market targeted its 52-week high late on Tuesday at 104.12 a barrel and surged past it trading up to new yearly high of 105.49 early Wednesday morning basis August futures.
THE TECHNICALS
It is important to always be aware that markets make moves and then fill gaps. With keeping this premise in mind, one of the indicators I keep an eye on is the RSI or relative strength index. Sometimes this indicator can reveal if a market is overbought or oversold.
Looking at the crude chart, if crude oil trades over 108 a barrel it will reach an RSI of over 80, which may indicate an overbought market that might be ripe for a correction.
THE TRADE
Therefore using this premise if crude trades over 108 a barrel, I will propose the following trade. I will look at buying the September crude 103 put and sell the September crude 98 put for a purchase price of 50 cents, or in cash value $500.00. The risk on the trade is the cost of the trade, which in this case is $500.00 plus all commissions and fees. If both strikes finish in the money at the time of expiration, the maximum a trader could collect is $5,000.00 minus all commissions and fees.
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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.
