Option play: Will grind lower continue in crude?

July 9, 2014 04:35 AM

As far as the fundamentals and the technicals are concerned in the crude oil (NYMEX:CLN14) market right now, how far do we think it will continue to fall? Fundamentally, I believe there are 3 major reasons why crude oil prices will move lower to sideways for the most part over the next 60 days or so.

1. The Al-Qaeda insurgency in Iraq has not made it and does no look like it will make it to the south of Iraq were three quarters of the countries oil is produced.

2. There is still more than 380 million barrels of crude oil supplies here in the United States, which is substantial in my view.

3. Finally, I don't think we will see the big drop in supplies this year after the big July 4 weekend.

For example, the American Petroleum Institute (API) today (July 8) showed a 1.7 million barrel draw down. That is after typically, the biggest driving weekend of the summer. Well, we will see what the Energy Information Agency (EIA) says today at 9:30 am Chicago time. I believe it will be bearish to neutral.



Source: eSIGNAL


Technically, in my opinion we are on the verge of a full blown "SUPER-TREND" down. As always, I have added my favorite technical indicators to the daily crude oil chart. The 9, 20, and 50 day Simple Moving Averages (SMA's), the Bollinger Bands (yellow lines), and finally the Candlesticks formation chart (red and green bars; each represents one day).


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Now the reason that this market is on the verge of a full blown "SUPER-TREND" down is this; the 9-day simple moving average (red line) has crossed down and under the 20-day SMA (green line) as the 9-day SMA points lower on a very sharp angle and the market itself trades below the 9 and uses it has resistance. The only reason the market is not in a full blown "SUPER-TREND" down is because of the 20 day SMA (green line) it is still pointing slightly higher. However, I do not see this lasting for long and I do have a sell here and I am bearish technically.

I figured this out by going back and forth from a daily to a weekly chart by the click of a mouse which I found here, which is a web application that we have developed for our clients called MARKETHEAD where I get about 80-85% of all my research from. That means I get both technical and fundamental research from this web app and I am a veteran series 3 Broker of 15 years. So if I'm using it then maybe my reader's should check it out. Yes?


Option play

I pride myself on being a "trend trader" and trying to make recommendations to my clients with options that place us in the direction of the existing trend, which in this case is clearly down.

I would recommend buying puts or put spreads with a call for a hedge or "insurance" in a 3 to 1 ratio. I would also recommend selling deep out of the money calls as well.

Remember, when you sell naked options you have unlimited risk and should have a "well-funded" account of risk capital. For exact details on months, expiration dates, strike prices, and number of positions feel free to contact me at 312-277-0115 or mmckinney@zaner.com.


About the Author

Matt McKinney is a full-service options broker at Zaner Group both buying and selling energies, metals, grains, softs, currencies and the 30-year bond market. My strategies include time frames of 45-120 days with the ability to liquidate at any time. I can be reached at mmckinney@zaner.com.

Whether you're a novice trader who wants to participate in options on futures or an experienced trader, you can also check out my blog at http://www.mmckinneyfutures.com/.