Option play: How low can crude oil go?

September 25, 2014 12:25 PM

Fundamentally, the United States, the world's largest consumer of crude oil, is sitting on what I would consider a massive glut of this commodity. We are about 11 million barrels above the 5 year average and about 4 million barrels higher than last year at this time. It begs the question will crude consolidate and head sideways for a time or is it getting ready for the next leg down?

There is a lot going on that should impact this market in a bullish way in my opinion. Problems with ISIS or ISIL in Iraq, the forever ongoing fight over the Gaza strip, air strikes in Syria now, and blah, blah, blah bulls! If these type of events can't make crude go higher then I have to believe that good old fashioned fundamental supply and demand will kick in and push crude oil to new lows for the move.


November crude oil, daily chart

Technically, on the chart below 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. I have also placed a bright white arrow line pointing lower indicating a long trend of resistance that is holding even after some recent consolidation in the crude oil market.

The crude oil chart below with my favorite indicators on it along with the bright white arrow resistance line tell me that we are still in a downward trend as the 20 day SMA (green line) is still pointing on a lower angle and the market is hovering right around it and almost closing directly on it today (9/25/14). So instead of heading sideways and staying range bound or going back to a "SUPER-TREND" lower the next few days will be important I think.

I figured this out by placing my favorite indicators on the charts and studying them which I found here,  which is a web application that we have developed for our clients called MARKETHEAD where I get about 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 readers should check it out. Yes?


Option 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.

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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/.