Capitalizing on a range-bound oil market

Price of crude oil rose over $104 because of the more optimistic U.S. economy, which grew 1.7% in the second quarter, beating estimates placed around 1%. “Energy prices have been supported in recent weeks by renewed optimism about global demand and a revival of concerns about the geopolitical situation in the Middle East,” said Jessica Hinds of Capital Economics. “However, we do not expect this to last.”

Weak demand plagued the economy in July with a drop in consumer confidence in addition to a slide in Chinese manufacturing which slipped to an 11-month low last week. China is the second-largest oil consumer in the world, and analysts predict that prices will be further affected by the country’s poor performance.

A surprise came from the Energy Information Administration, which reported an increase of 400,000 barrels in crude oil supplies for last week, a growth spurt of 0.1% that brings the total count to 364.6 million barrels. This increase came out of the blue as analysts were predicting as much as a 3 million-barrel decline in the stockpiles based on the 30 million barrel decrease that occurred over the past four weeks. Despite this expansion of supply, Bank of America Merrill Lynch reported that the rising production in the U.S. and deteriorating growth in emerging markets will stifle the recent growth in oil prices. However, oil disputes in countries like Iraq, Libya and Iran will help keep oil prices over $100, and the activity in those regions should counteract not only the lower prices from increased U.S. shale oil supply but also the fears about sub-par Chinese demand.

With continuing uncertainty in economies around the world, it is likely that crude will remain range bound for the near term future. So how can a trader capitalize on a market that is trading within a range? We can set up a strategy that will allow a trader to collect premium in a market that is range bound. This strategy is known as an iron condor.

Trade: Selling the CL Oct 113.5-114.5 Call Spread and the 101.5-100.5 Put Spread for $0.37 Credit.
Risk: $630 per 1 lot
Reward: $370 per 1 lot
Breakeven: $113.87 and $101.13

This trade is established for a net credit and profits in a very wide range. If a trader believes that the price of crude oil futures will be within this range at October expiration this trade sets up well.

Click to enlarge.

About the Author
James Ramelli

James Ramelli is the Moderator of the Live Futures Options Trading Room at where he actively trades futures and options on futures while educating members on strategies, setups and risk management. He has a degree in Finance with a focus in Derivatives Trading and Financial Engineering from The University of Illinois and has been trading for five years. James appears regularly on Bloomberg T.V. and BNN and writes a weekly column for Futures Magazine.

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