Crude prices took a fall last week after larger than expected surplus supplies last Wednesday. Price fell from $46.26 per barrel to $44.75 within the space of an hour. The Energy Information Agency (EIA) released data for crude oil stock piles showing a decrease of 1.6 million barrels when the market had been expecting a decrease of 2.7 million barrels.
The markets have also been concerned as to the effectiveness of the last OPEC deal in Vienna. With countries like Iran that continue to increase output along with US shale production showing no signs of cutting supply anytime soon. There had been a hope for an extension of the OPEC deal to cut production out to the end of 2018, but the last OPEC meeting produced a much shorter extension to March 2018.
There is much debate as to how low price can go as it begins to be unprofitable for many rigs to produce oil profitably. But what may concern developed economies may not necessarily be an obstacle in developing nations. Investors are therefore looking closely at EIA data for crude oil stocks as in indication as to the state of supply in the US.
Tomorrow at 03:30 pm, we will have EIA data for crude oil stocks for the latest week. Market consensus is for another decline in inventories of around 2 million barrels, anything short of that may send prices tumbling again. Later this evening at 07:30 pm, the American Petroleum Institute will publish its own estimation of crude oil stockpiles. This report is expecting an increase in stocks of around 2.7 million.
The main advantages of using an option compared to opening a Spot position comes in the reduction and mitigation of risk. Buying an option may be cheaper than the cost of your stop loss if it is reached. Bear in mind that after big figures like EIA Crude Oils Stocks the market may experience extreme increases in volatility therefore stop losses must be very wide and can be expensive. Stop losses may not always be closed at the price you placed as a stop. In a Fast market, typical after a surprise in important data releases, the price you are stopped at may differ considerably. With options that simply cannot happen, the cost of the option is your total risk when buying.
If you feel that crude oil will rise in price over the next week, then all you need to do is buy a Call option, which gives you the right to buy at a set price (strike), for a set date (expiry) and for an amount of your choice.
The screenshot below shows that a crude oil Call option with a $44.67 strike, 7-day expiry and for 100 barrels would cost $68.71, which would also be the maximum risk.
This screenshot shows the profit and loss profile of the above Call option, just click the Scenarios button.
If on the other hand, you feel that crude oil will continue to fall in price then all you need to do is buy a Put option, which gives you the right to sell at a set strike, expiry and amount of your choice.
The screenshot below shows that a crude oil Put option with a $44.66 strike, 7-day expiry and for 100 barrels would cost $69.17, which would also be the maximum risk.
This screenshot shows the profit and loss profile of the above Put option.
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