The energy markets have seen some good moves in the past few months, and I’ve received a lot of questions recently on how to capitalize on them. Right now, movements in crude oil has less to do with supply and demand than emotion. One approach I recommend is a spread strategy, where you develop a core long-term position in conjunction with a short-term position, which can be a good way to manage volatility. I’ll outline a strategy in crude oil as well as the RBOB gasoline/crude oil “crack” spread to consider.
Before you trade, know how much money you need to trade effectively, and how much risk you feel comfortable with. To trade energy markets, I recommend starting with $50,000 in your account. While you certainly can trade energy markets with less than that, these markets can be volatile, and I have found that the more successful traders have been over-capitalized and underleveraged.
Crude oil trades in every month, or “serial” contract months. Initial margin for NYMEX crude oil is currently $7,763, while maintenance is $5,750 (subject to change). (See NYMEX contract specs.) A mini crude oil contract is available as well, with lower margin requirements.
In my experience, crude oil is pretty liquid in contracts dated out a year, but much farther than that, and liquidity can be an issue at times. Work with a professional if you aren’t sure how to plan the appropriate long-term trading strategy.
Say you have a long-term bullish outlook for crude oil, over two years. However, we know the market won’t go straight up during that timeframe; there are likely to be some pullbacks and corrections. You can hedge your position by initiating a spread trade.
Crude Oil Spread
If you think crude oil is likely to be higher in two years than where it is trading today, consider your plan of attack in case of downturns between now and then. One strategy I am recommending is a December 2010 crude oil/June 2009 crude oil spread. You would buy the December 2010 contract, your “core” position, and sell the June 2009 contract, your “hedge” position. Initial margin on the spread is $844, while your maintenance is $625 (subject to change). The exchange recognizes you are mitigating some of the risk by requiring lower margin on the spread than if you had taken just one side of the trade. This isn’t a license to buy lots of contracts and get overleveraged, however. You could consider it a safety valve, but you haven’t completely eliminated all of the risks involved.
Another strategy I like right now is the NYMEX RBOB gasoline/crude oil spread in a 1-to-1 ratio, as I believe gasoline is likely to outperform crude oil over the next few months as we go into driving season. You would buy NYMEX RBOB gasoline and sell crude oil at a specific price. As gasoline outperforms crude oil, the spread widens. Initial margin is $2,480 and maintenance is $1,839 (subject to change).
The farther you go out in time, typically the higher the premium for crude. Currently, December 2010 crude is trading near $67 a barrel, while the front-month May contract is trading near $50. From a technical perspective, the chart of the May contract shows resistance around $54 and a double-bottom at the 50-day moving average near $47. I think this market is setting up for some type of triangle pattern and may go sideways for a while. I’m not sure if it will go straight up, or down.
If the market breaks $47 in the front month, I would recommend stepping in and shorting the June contract, while holding your core long position in December 2010 contract. You can trade around your short-term position in the June contract, and may get out of it in a matter of a day or days if you wish. If the market trades below $47, I think there are likely stops that will send the market lower, perhaps to $40. You’d lock in profits on your short front-month position if the market drops, and you still have your core long-term bullish position.
Conversely, if market trades and closes above $54, I see a double top around $58 – $59 as a likely target, followed by the 50-day moving average at $74-$75. I would then not recommend taking the short-term position; just maintain your long-term core position and continue to monitor the markets. You can do this type of strategy in any futures market, not just crude oil.
Feel free to call me for more specific strategies in this or other markets to suit your individual risk tolerance. These types of strategies can require constant monitoring of the markets, and working with a professional can help facilitate that when you don’t have time to do so yourself. Ask about a special half-off offer for new clients.
Richard Ilczyszyn is a Senior Market Strategist with Lind Plus. He can be reached at 800-605-0095 or via email at rilczyszyn@lind-waldock.com.
Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.
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