The DeCarley Perspective Trading Newsletter
Crude oil volatility high, sell option strangles?
Market: Crude oil, $CL_F, $QM_F
Buy or Sell?: Option values are inflated due to Middle East Tensions, sell strangles
Range: Crude oil prices face resistance near $96 and again near $100, support near $92 and $87. We expect prices to remain range bound
Crude oil traders are currently facing bearish supply fundamentals, but have recently been reminded that continued supply isn't necessary a constant nor a guarantee. Fresh tensions in the Middle East are a start reminder to the market that short-term supply disruptions are possible at any time and can have a significant (albeit temporary) impact on prices. As a result of the uncertainty, and speculation over the Algerian events becoming a problem to the markets, option values have seen increased in implied volatility. In our opinion, this creates an ideal environment for option selling.
Specifically, we like the idea of selling the April $105 call and the $85 put in crude oil. The net premium collected should be about $1.40, or $1,400. This trade has 58 days to expiration, and if held the entire time faces a profit zone between $106.40 and $83.60. In other words, as long as the market is between these $106.40 and $83.60 at expiration, the trader makes something. The maximum profit of $1,400 before commissions and fees occurs at expiration if the market is trading between the strike prices of $105 and $85 (noted in blue on the chart). In our view, this provides traders with a high probability opportunity...but of course there are never any guarantees.
As always, there is unlimited risk in option selling.
Futures, Options, Integrity
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There is substantial risk in trading options and futures. Doing so may not be suitable for everyone. 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 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. Website administrators, affiliated brokers, employees etc. may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. 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.