Back Month Bullish Stance in Oil
Back Month Bullish Stance in Oil
The oil market is probably best being paper traded by most, but for those that crave the action here are a few ideas on how to play the upside.
The most volatile oil market in history has one silver lining...the ability to create attractive option spreads for those that were lucky enough to be on the sidelines when chaos struck last month. As of the writing of this newsletter, support levels on the daily charts appear to be holding with the September contract standing out as being more stable. In recent weeks the front-month oil contracts have been dominated by wild speculation, algos, and panicked/forced liquidation while the back months have been slightly less irrational.
The September futures have held trendline support and are experiencing moderately less intraday volatility. Thus, we like the idea of using September options to create a bull call spread with a naked leg (details below).
Please note, the risk is theoretically unlimited beneath the strike price of the short put, so this strategy involves hefty margin and risk tolerance.
ALTERNATIVE STRATEGIES
Thank goodness for micro crude oil futures. Although small, they can still deliver profit/loss potential in this type of volatility. A smaller, lower-margined, and less hectic way to play the upside in oil is to simply buy a September micro crude oil futures around $93.00 with hopes of a resumption of the uptrend. To put risk in perspective, if the market drops to $75.00 the loss would be $1,800. If oil returned to $105 the profit would be $1,200 (each dollar in price change is worth $100 to a trader).
SEPTEMBER CRUDE OIL BULL CALL SPREAD WITH A NAKED LEG
BUY SEPTEMBER OIL $95 CALL
SELL SEPTEMBER OIL $105 CALL
SELL SEPTEMBER OIL $75 PUT
Total Cost = $0 (This spread can be done for roughly even money before considering transaction costs)
These options expire on August 17th, 128 days to expiration
Margin = $9,600
Risk = Unlimited below $75
Maximum Profit = $10,000 before transaction costs (this assumes the trade is held to expiration which is not likely; a worthy target would be $5,000 to $6,000
Zaner360 symbols:
OCLU22 C95, OCLU22 C105, AND OCLU22 P75
*There is a substantial risk of loss in trading futures and options. There are no guarantees in speculation; most people lose money trading commodities. Past performance is not indicative of future results.
*There is a substantial risk of loss in trading futures and options.
Past performance is not indicative of future results
Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data.
Seasonality is already factored into current prices, any references to such does not indicate future market action.
**There is substantial risk of loss in trading futures and options.** These recommendations are a solicitation for entering into derivatives transactions. All known news and events have already been factored into the price of the underlying derivatives discussed. From time to time persons affiliated with Zaner, or its associated companies, may have positions in recommended and other derivatives. Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction. Seasonal tendencies are a composite of some of the more consistent commodity futures seasonals that have occurred over the past 15 or more years. There are usually underlying, fundamental circumstances that occur annually that tend to cause the futures markets to react in similar directional manner during a certain calendar year. While seasonal trends may potentially impact supply and demand in certain commodities, seasonal aspects of supply and demand have been factored into futures & options market pricing. Even if a seasonal tendency occurs in the future, it may not result in a profitable transaction as fees and the timing of the entry and liquidation may impact on the results. No representation is being made that any account has in the past, or will in the future, achieve profits using these recommendations. No representation is being made that price patterns will recur in the future.
Due to the volatile nature of the futures markets some information and charts in this report may not be timely. There is substantial risk of loss in trading futures and options. Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.
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