Monday, December 6, 2010

Oil is feeling toppy but well supported!

Although I am not able to blog about every trade that I make due to the lack of time...I do from time to time have some time to share what I am doing. The energy complex has seen a pretty nice move since late August when the fed started talking about a second quantitative easing package. This is the third time this year that crude is trading at over $80/bbl, the past few times crude has tried to sustain any rally above $80/bbl it has failed. But this time if seems well supported at $80/bbl and crude has since take out the years highs, to put up numbers we have not seen in over two years.

There is definetly momentum behine the oil trade and in the medium term I think crude has a date with $100, but short term it seems overdone and due for a pullback. So how am I trading this?

1) As per the chart below Oil is looking overbought by way of the bollinger bands, and is almost there on the 14-day RSI. Although it still may have a bit more to climb I think we are approaching a $2-$5 selloff in the coming week and a half. But since I know that oil does not have to correct I am not willing to short crude and I don't really want to pay up for the premium. So instead I want a defined risk trade that has low risk and a high payout if I am right in my forecast. So today I bought 20 89/87/85/83 put condor for 54cts.

Risk = $10,800
Reward = $29,200 (max reward achieved between 85-87)

Ohh...and by the way I chose this strategy knowing that next week was option expiration week.

2) Beyond next week I still think that oil and its related products have some room to run into next year. I have heard so many talking $100 oil again that I think it becomes a self fullfilling prophecy. So I have actually bought $100 calls (low vol and low delta).

But unlike the run we had in 2008 where demand was strong, this rally is off of weak fundementals and I am not sure it will be able to sustain such high prices given teh economic landscape and the record levels of inventory. I tentativly have a plan to buy OTM puts as we get closer to the $100/bbl mark. But I will continue to be nimble and trade what I see in the market place.


  1. Crude hit $90.76 in the overnight session, in which it was not able to hold onto those gains as it opened in the US. The closing candle today has a pretty long tail, and when you look back at history on the chart, this type of chart usually is followed by a corrective move to the downside.

    There are a few things that I forgot to mention as I ran out of time writing this blog post yesterday. When I bought the Put Condor the probability of breaking even to making money was about first glance you might think that those odds aren't great...and at first I would agree with you, but only if I agreed with the probabilities. In my opinion this trade has more like a 70% probability of breaking even to making money by option expiration. Mostly due to the technical factors stacking up against crude from continueing higher before a corrective down move. Today the probabilities increased to 42.48%.

  2. So I bought this thing for 54 cents and today was able to sell it for almost a double at 90 cts. Going into the weekend we have OPEC meeting and China to decide whether or not to raise interest rates. When I pay for premium I do not like to give up profits and with such little time and uncertianty over the weekend it is best to just book the profit and move on.