Playing both sides of the crude inventory report

June 9, 2014 06:27 AM

Every week on Wednesday, the Energy Information Administration (EIA) releases a report on the change in the amount of crude oil held in inventory during the past week. This report, released at 10:30 AM Eastern, has the potential to increase volatility and create sizeable moves in the price per barrel of crude oil.

It probably goes without saying, but two things traders look for are volatility and market movement which create trading opportunities. In almost all cases though, where there is volatility and potential for large market swings, there is also an equal to or greater at times , level of risk.

So how can oil traders take advantage of the conditions surrounding the EIA report and yet maintain an acceptable level of risk?

One choice may be a short-term, intraday binary option. Binary options offer the same limited risk profile of going long a traditional option and the same flexibility of strikes to create both directional and non-directional trading strategies. Because of the short-term nature with contract durations as short as two hours, a trader can pin point a market moving event and place a trade, without paying unneeded time premium.

For example, take the market action from June 4, 2014. The underlying crude oil contract was trading around $103.25 an hour before the EIA announcement. The Nadex platform listed binary option strikes from 102.41 to 104.01 in 20¢ increments for the 11:00 AM Eastern expiration.

Looking at the binary strikes of Crude Oil (Jul) > 103.61 and > 102.81, expiring 30 minutes after the report shows a potential solid non-directional trade set-up.

The first leg, Crude Oil (Jul) > 103.61 had an offer listed of 14 – meaning a trader was able to buy this contract for $14.00. The trader has a maximum loss of $14, maximum potential gain of $86.00, not inclusive of exchange fees.

The second leg, Crude Oil (Jul) > 102.81 was 84 bid – a trader would be able to sell this contract at $84. With a binary short position the trader’s maximum loss potential is $16 with a maximum potential gain of $84, again not inclusive of exchange fees.

At this point, the trader could walk away and hope that the market either settles above $103.61 or below $102.81 to receive the full payout on one side, while taking a small loss on the other side. Hope and greed though, do not build a solid trading plan.

Instead, and because there may be a quick market move, that could easily reverse, the trader may want to consider putting limit orders on both sides to take profit early on the full or a partial position.

For example, if the underlying crude oil market moves in either direction near one of the binary strikes ($103.61 or $102.81), the binary contract should be priced around the 50 level. This may be a level to gauge where the trader decides to take profit. Additionally, by setting profit targets early on both sides, if the market makes a whipsaw move—something that happens frequently around major reports with multiple data points— it is possible the limit orders for both sides could get filled.

This is just one example of how to use binary options around a news event such as the EIA Crude Oil Inventory report. The principle is equally applicable around a major technical support or resistance level where the market could bounce or break out

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