The moves in crude oil have grabbed everyone’s attention over the last few months. Since November, we have seen the price of crude move from near $80.00 a barrel to below $40.00. The debate whether lower priced crude is good for the economy continues. Recent bounces from the low also have many investors wondering if the “the bottom” is in, and if we will return to the higher levels we have been accustomed to over the last few years.

The U.S. Dollar has been flexing its muscles recently, trading at levels we haven’t seen in nearly five years. As most of you already know, most commodities have an inverse relationship with the USD. A strong US Dollar usually means lower commodity prices. The current situation is no exception, and the U.S. Dollar trading near 93.00 is putting pressure on crude oil.

In the near term, we have seen crude trading above $50.00 a barrel again. This week we have seen wild swings in both directions. I have a feeling that we may still make a visit to the 43.00 level, possibly even breaking 40.00. In the longer term, I think as we approach summer there is concern for higher prices again.

The Trade

  • In a longer term view, I like buying the May Crude Oil 65-70 call spread at 50 points ($500.00) or better.
  • Full value of the spread at expiration (04/16/15) is $5000.00.
  • I am setting an early exit target of 200 points.
  • We are long premium in this trade, so risk is limited to the cost of entry plus fees and commissions.

I hope you are enjoying the lower prices at the pump as much as I am. Unfortunately I don’t think they are here to stay. Corporations hedge all the time to manage exposure in the markets. Hedging isn’t just for the big boys; think about how much driving you are going to do on a spring break or on summer vacation. A little hedge against higher gas prices might not be a bad idea.

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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.