Options play: Crude oil could go much lower

September 9, 2014 05:35 AM

October crude oil prices fell to a new 7-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 U.S. Non-Farm Payroll data late last week. An added headwind for the crude oil market came with strength in the U.S. 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.

Crude oil, November, daily

Technically, on the chart above I have placed my favorite technical indicators. They are the 9-day Simple Moving Average (SMA, red line), the 20-day SMA (green line), and the 50-day SMA (blue line). I have also added the Bollinger Bands (BB's, yellow lines) and Candlesticks (red and green bars), each bar represents one day of trading on these daily charts.

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.

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.

For exact details on other types of risk, months, expiration dates, strike prices, and number of positions feel free to contact me at 312-277-0115 or mmckinney@zaner.com. In addition, I am by no means "married" to the silver market. I like to make trade recommendations to my clients in the direction of the existing trend whether the market be the precious metals, energies, currencies, financials, softs, grains and more.


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/.