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.
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.
ReplyDeleteThere 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 30%...at 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%.
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.
ReplyDelete