Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Friday Stock Market CRASH Following Israel Attack on Iranian Nuclear Facilities - 19th Apr 24
All Measures to Combat Global Warming Are Smoke and Mirrors! - 18th Apr 24
Cisco Then vs. Nvidia Now - 18th Apr 24
Is the Biden Administration Trying To Destroy the Dollar? - 18th Apr 24
S&P Stock Market Trend Forecast to Dec 2024 - 16th Apr 24
No Deposit Bonuses: Boost Your Finances - 16th Apr 24
Global Warming ClImate Change Mega Death Trend - 8th Apr 24
Gold Is Rallying Again, But Silver Could Get REALLY Interesting - 8th Apr 24
Media Elite Belittle Inflation Struggles of Ordinary Americans - 8th Apr 24
Profit from the Roaring AI 2020's Tech Stocks Economic Boom - 8th Apr 24
Stock Market Election Year Five Nights at Freddy's - 7th Apr 24
It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- 7th Apr 24
AI Revolution and NVDA: Why Tough Going May Be Ahead - 7th Apr 24
Hidden cost of US homeownership just saw its biggest spike in 5 years - 7th Apr 24
What Happens To Gold Price If The Fed Doesn’t Cut Rates? - 7th Apr 24
The Fed is becoming increasingly divided on interest rates - 7th Apr 24
The Evils of Paper Money Have no End - 7th Apr 24
Stock Market Presidential Election Cycle Seasonal Trend Analysis - 3rd Apr 24
Stock Market Presidential Election Cycle Seasonal Trend - 2nd Apr 24
Dow Stock Market Annual Percent Change Analysis 2024 - 2nd Apr 24
Bitcoin S&P Pattern - 31st Mar 24
S&P Stock Market Correlating Seasonal Swings - 31st Mar 24
S&P SEASONAL ANALYSIS - 31st Mar 24
Here's a Dirty Little Secret: Federal Reserve Monetary Policy Is Still Loose - 31st Mar 24
Tandem Chairman Paul Pester on Fintech, AI, and the Future of Banking in the UK - 31st Mar 24
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Black Gold: Oil Option Trade Setup – Will Oil Bounce? Who Cares!

Commodities / Crude Oil Jul 11, 2014 - 05:42 PM GMT

By: Chris_Vermeulen

Commodities

Oil futures were on the tip of every political and financial pundits’ tongues less than a month ago as geopolitical tensions in Iraq heated up. Fast forward to today, and tensions in the Middle East have intensified further. However, since June 25th oil prices have been falling fast.


Oil futures prices have fallen from around $107.50 per barrel down to around $101.50 / barrel as I am writing. As the chart below indicates, oil futures should see some support around the $101 per barrel price level and stronger support yet down around $98 per barrel.

Is this a pullback that is setting up for a larger move to the upside, or is oil prices going to move down toward $95 / barrel again? Purely from a statistical standpoint, including June 25th through today oil prices have traded 12 sessions. During those 12 trading sessions, oil prices only managed to close in positive territory 4 times with some very strong selling pressure along the way. In raw percentage terms, oil futures have lost nearly 5.5% since June 25th peak to trough.

Purely from a statistical standpoint, the probabilities are favorable that at the very least a bounce could play out in the near future that lasts several trading sessions. Furthermore, that bounce could turn into a stronger move to the upside in the weeks ahead. Obviously at this point it is purely speculation, but the intermediate to longer term trend on the daily time frame is clearly to the upside.

Instead of just rushing in and buying a long oil position using futures or purchasing an oil ETF like USO, I wanted to construct an option trade that would capitalize from higher oil prices in the near term, but with some hedging in case more downside occurs.

In order to accomplish this, I am going to use a standard Iron Condor trade construction. This construction capitalizes on time decay and volatility decay. Additionally this structure will allow traders to profit from a consolidating price pattern as the profitability is measured in a range.

However, when designing this trade structure I want to skew the position to the upside by selling the put side of the Iron Condor Spread closer to the current USO price. The call credit portion of the spread will be sold further from price. By structuring the trade in this way, I will maximize the profit potential of this trade and provide some hedging by reducing the total maximum risk per spread by adding the call credit portion of the trade.

Consider the price chart of USO which is shown below. I have highlighted the price range that would be profitable to the August monthly option expiration which would occur at the close on August 15th.

As long as price stays in the range shown above, the USO August Iron Condor Spread would be profitable. This strategy does involve some patience, but if USO prices shot up in a short period of time the trade could be closed for some nice potential profit.

The trade structure I have chosen would have a profit potential of $35 per spread, or a total potential return based on maximum potential risk of 30.43% per spread. The probability based on today’s implied volatility in USO options for the entire spread to be profitable at expiration (August 15th) is roughly 72%.

Our new option service specializes in identifying these types of trading setups and helps investors capitalize on consolidating chart patterns, volatility collapse, and profiting from the passage of time.

And if advanced options trades are not for you, we also provide simple option trading setups where we buy either a call or put option based on the SP500 and VIX. The nice thing about buying calls and puts is that you can trade with an account as little as $2,500 with big potential upside.

If You Want Daily Options Trades, Join Technical Traders Options Alerts: www.TheTechnicalTraders.com/options

Chris Vermeulen

Join my email list FREE and get my next article which I will show you about a major opportunity in bonds and a rate spike – www.GoldAndOilGuy.com

Chris Vermeulen is Founder of the popular trading site TheGoldAndOilGuy.com.  There he shares his highly successful, low-risk trading method.  For 7 years Chris has been a leader in teaching others to skillfully trade in gold, oil, and silver in both bull and bear markets.  Subscribers to his service depend on Chris' uniquely consistent investment opportunities that carry exceptionally low risk and high return.

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Chris Vermeulen Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in