Crude oil/unleaded gasoline
Petroleum markets experienced a steady liquidation phase this week as news from Iran and the hurricane front remained quiet, allowing traders to focus on the bearish fundamentals of these markets. As we stated in our crude oil feature last week, the core fundamentals for crude oil and unleaded gasoline remain bearish. Stocks for both commodities remain burdensome. As of this week’s American Petroleum Institute (API) report, U.S. crude stocks remain 19.2 million barrels above year-ago levels, while gasoline stocks are 8.27 million barrels above the 14-year average. With crude trading in the mid $70s earlier this summer, we estimated there was a $15 to $20 per barrel of fear premium in the market.
The market has declined roughly $10 per barrel since then, which still leaves a $5 to $10 per barrel of premium based on fears of supply disruptions. With little news available to stoke these fears in the near term, expect this premium to continue to come out of the market unless a storm threatens or the Middle East heats up again. While crude prices have declined somewhat since we recommended call sales last week, we still feel the calls are overvalued and should provide opportunities for collecting premium on a bounce in prices next week. We believe selling calls in unleaded offers similar opportunity but advise traders to look for the higher-volume options. With little open interest coming out of the market on the price decline, we believe speculators are still holding a good-sized long position in crude and unleaded. When these traders finally decide to unload their long positions, the market could have quite a bit of room left on the downside.
To watch James Cordier’s September 7 CNBC interview on the crude and unleaded gasoline markets, click here: www.libertytradinggroup.com/news.html
Natural Gas
Natural Gas prices have been falling since tropical storm Florence started tracking north. Gas prices have had little catalyst to move higher with the exception of tropical activity. Like crude oil, natural gas supplies remain relatively high with stocks now 312 billion cubic feet (bcf) above year-ago levels. Unlike crude, however, natural gas prices began their torrid price decline from a relatively nominal price level, not from record highs. In addition, the fear premium in natural gas is not as high as in crude because most natural gas consumed in the United States is produced domestically. The supply story is about as bearish as it gets. However, the market has fallen to a level that may reflect the current supplies and may now begin to focus on external factors such as the vague threat of hurricanes and the impending winter season. Natural gas prices showed a hesitancy to follow crude lower through the latter part of this week and we believe they have attained a value level. We may have been a bit premature in recommending put sales two weeks ago, but the strikes were far enough below the market that they have not substantially appreciated. We think the recent weakness is a second opportunity to sell puts for investors who have not yet done so.
Silver
Technical traders playing the consolidation breakout in silver prices earlier this week likely got whipsawed in the reversal by week’s end. Silver is trying to balance the reduced threat of inflation against the recent strength in the U.S. equities market. This week’s strengthening dollar was most likely responsible for the sell off in silver. However, we don’t look for silver prices to wash out, as silver remains a favorite of commodity and hedge fund managers. We expect silver will resume its balancing act and trade in a defined range at least until the next Fed meeting. At this time, silver appears to be an excellent candidate for strangle strategies (selling both puts far below the market and calls far above the market).
If you would like more information about selling options in the commodities markets or building a portfolio based on the option selling approach, please feel free to call or visit us on the web.
James Cordier
Michael Gross
Liberty Trading Group
401 East Jackson Street
Suite 2340
Tampa, FL 33602
800-346-1949
www.optionsellers.com
James Cordier is head trader and president of Liberty Trading Group, a futures brokerage firm specializing in option writing on commodities. James’ market comments are published by several international financial publications and worldwide news services including The Wall Street Journal, Reuters World News and Bloomberg Television News. Michael Gross is an analyst with Liberty Trading Group. Mr. Cordier’s and Mr. Gross’ book, The Complete Guide to Option Selling (McGraw-Hill 2005) is available at bookstores and online retailers now.
***The information in this article has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. Use it at your own risk. There is risk of loss in all trading. Past performance is not necessarily indicative of future results. Traders should read The Option Disclosure Statement before trading options and should understand the risks in option trading, including the fact that any time an option is sold, there is an unlimited risk of loss and when an option is purchased, the entire premium is at risk. In addition, any time an option is purchased or sold, transaction costs including brokerage and exchange fees are at risk. No representation is made that any account is likely to achieve profits or losses similar to those shown, or in any amount. An account may experience different results depending on factors such as timing of trades and account size. Before trading, one should be aware that with the potential for profits, there is also potential for losses, which may be very large. All opinions expressed are current opinions and are subject to change without notice.
