Crude Oil Options: Is Texas Tea going UP or DOWN next?
Crude Oil Options are ripe for picking. It’s nearing the last week in July 2018 and Crude Oil is about $66 per barrel. Just in past week the President of Iran and the United States President have swapped threats over oil sanctions. Meanwhile, the USA has 95 more rigs making oil than this time last year and the USA is now the world’s #1 oil producer. The Saudis and others seem to be pumping slightly less oil now than two months ago and there is talk of the world economy slowing while at the same time later this week the USA GDP could be higher than 4% this quarter for the first time in years. Truly, there is a mixed bag of news items that have the potential to drive the market up or down over the next few months. During times like this, it’s frankly quite difficult to try and derive whether the crude oil market moves UP or DOWN next.
Short Strangles with Strikes Where Prices are Not Likely to Go
This presents an opportunity unique to option-sellers as we can place trades for both directions at the same time with a strategy called the short strangle. More specifically, the short strangle can sell at the same time, BOTH a far out-of-the-money CALLS and far out-of-the-money PUTS. With the JAN-2019 Crude Oil futures trading about 65.83, a trader might consider selling the JAN18 CALL at strikes of 85 or higher, and selling the JAN18 PUT at strikes at 50 or lower – for a total of $280 to $600 per strangle, depending on the strikes the trader selects. Margins to place such trades would likely run from $500 to $900 for the initial margin (SPAN min. yours may vary.) Such a trade is not without risk certainly. One cannot quantify the risks associated with the behavior and talk of world leaders. The USA President holds the spigot to 750 million barrels of strategic reserves and has expressed a desire to keep oil prices down. The Iranians are facing more sanctions from USA allies coming up very soon.
Here is a chart of the JAN19 Crude Oil prices with strike ranges notated. The CALL strikes above 85and the PUT strikes at 50 and below are highlighted in yellow: My newsletter readers will find out if/which strikes I sell and the timing if I place this trade. In a few days, after I see the reaction to the sanction deadlines – I will better be able to evaluate this idea.
In my subscriber -based newsletter THE OPTION INCOME TRAINING BULLETIN, trades similar to this discussion are placed usually about 4 to 8 trades per month. I publish the date I trade, the strikes I trade, the amount of premium I collect – and post charts, option matrix, the Probability of Profit of the trades, the margin money required to place them (SPAN minimum, your could vary), as well as an historical price charts of the underlying futures contact, fundamental analysis, and my comments about the “how & why” I selected the trade. I am not a broker, money manager, or software salesperson and I don’t sell any system to my readers. I merely provide trade illustrations and examples in order that my readers may learn to rely on their own opinions. I am not a trade advisor, I merely show people how I trade and document it all so they may learn this very unique strategy of Selling Commodity options. On this blog I often present trading ideas like the one in this article to illustrate the many type of trades and strategies that I teach in my newsletter by publishing my real trades to my readers (same day after 2PM.)
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Thank you and good trading.- Don
A lot of things have changed lately, so has personal investing. Maybe you should get some! – DAS