If you have been following the markets the last few weeks, you have noticed the falling price of crude oil. You probably also noticed the debate about the positive or negative economic effects.

This is relatively new debate. Historically, lower crude prices have generally meant the U.S. economy was in good shape, and lower prices usually represented some stability in the geo-political picture. Suddenly, this is not the case. Much of that stems from the negative effect lower prices will have on the oil companies, companies that represent a large part of the stock market. 

While the oil companies might drag the energy sector down a bit, lower crude oil prices spilling over to lower prices at the pump has a direct and positive impact on many more individuals.  Over the last 2-1/2 years, we have seen a tremendous move up in the equity markets.  Unfortunately, less than 50% of Americans participate in the stock market. Those who don’t have a retirement plan tied to the markets or those who don’t own stocks directly have missed out on that move. At the same time, the economy is adding more jobs, wage growth has been lacking.

If you own a vehicle and live in the Chicago area, this past June you would have paid just under $4.00 a gallon for gas.  That translates to $80.00 to fill a 20 gallon tank, $320 a month if you are filling up once a week. Last week pump prices broke below $3.00, and are now sitting near $2.80 on average. It now takes $56.00 to fill that 20 gallon tank, translating to nearly $100 savings per month. That might not seem like a lot, but that money is either helping people save more or it is going back into the economy. With 8.5 million licensed drivers in Illinois, that adds up quick.

Despite the recent sell off, I am looking for the equity markets to move up again. Lower gas prices also translate into consumer confidence and spending.

The Trade

  • I like buying the January E-Mini S&P 500 2075-2100 call spread at 10 points ($500.00) or better.
  • Risk is limited to the cost of entry plus fees and commissions.
  • This trade will take us into mid-January, and I am looking to stick around for as long as possible, with an exit at 22 points.
  • If the market reverses into the New Year, I would look to limit losses to 5 points or less

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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.