eSignal - Smarter Trading Tools

Options play: Crude oil breaks out, pulls back, could go lots lower

September 10th, 2014

MattMcKinney By Matthew McKinney, mmckinneyfutures.com

Fundamentally, I think the Hightower morning commentary that I read in our web application MARKETHEAD summed up the whole action in crude oil over the last 14 hours very well. It stated frankly that, “October Crude Oil prices fell to a new seven month low during the initial morning hours, weighed down by Chinese economic data overnight showing another drop in import activity. This stoked slowing economic growth concerns and comes on the back of disappointing US Non-Farm Payroll data late last week. An added headwind for the crude oil market came with strength in the US dollar, which is notably higher from weakness in the British Pound. So far, the crude oil market has shown little concern toward reports of rising violence in Eastern Ukraine that breached a temporary ceasefire put in play late last week with pro-Russian separatists. Friday’s softer August Non-Farm Payroll report served to raise concern over the current growth trajectory and stoked oil demand concerns.” Really what more can I say. This is the kind of information that I find on a daily basis and you can too right here: http://www.markethead.com/2.0/free_trial.asp?ap=mmckinne.

Technically, this particular formation and the way my indicators are lining up shows me that this market may go sideways for a while. With a high of around $95/barrel and a low of around $92/barrel. That was the case until today when we made a new low today/overnight (9/8/14) for the move and even though we closed back near my range, I believe once a market has made a move like this, it will go back to that price in short order. So I look for a new low close in the crude.

Daily November crude oil chart

mmckinney_chart

Options play:

Since I see crude prices moving lower from here a play could be to buy put options or bear put spreads with a call for a hedge in a 3 to 1 ratio just in case the trend changes dramatically to the upside. Another play could be to sell deep out of the money calls collecting premium. Remember selling naked options involves unlimited risk and should only be considered if you have a well-funded account.

Contact Matthew directly: 312-277-0115, http://www.mmckinneyfutures.com/, @mmckinney17