Crude oil has been dipping closer to levels that we haven’t seen in a few months. The contract broke $40 a barrel this week for the first time since April 18th. Inventories remain high, and we had another build in this week’s EIA Petroleum Status report of 1,400,000 barrels. We appear to have made it through the peak of summer driving season without much of a concern for any supply demand issue.
Wednesday did see a bit of a bounce, with crude getting above the $41.00 mark after trading below $40.00 to start the day. This seems like a bit of a bounce than a reversal to me. I think that crude has the $35.00 mark in site, but it is going to take a bit of time to stay below $40.00.
I am looking at a bearish play, using an option risk reversal strategy. I am trying to sell the 51.00 call and but the 35.00 put in October crude for a cost of 20 points ($200.00). The trade is short the 5100 call so there is unlimited risk on the upside. I am comfortable with that, as crude has had a hard time staying above 51.00 on its last visit there in June. I am looking to take advantage of a move down to the $35.00 level, and setting an early target exit of 70 points. Be sure and check margins and make sure this trade is suitable for your account.
For those interested Walsh Trading is holding our weekly grain webinar Thursday August 4th at 3:00 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.
Director of Commercial Hedging
Walsh Trading Inc.,
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.