Option play: Great week for crude oil bears

October 3, 2014 12:04 PM

What a great week for a crude oil bear like myself and if you've been following me you know how happy I am. The question still remains, how low can crude oil go?

Fundamentally, WTI (NYMEX:CLV14) today closed at $89.76/barrel, the lowest close since the month of October 2012 when it closed at $86.24/barrel. That's really nothing when you think that during the week of June 9 the market traded at a high of 107.68/barrel and about 4 months later on the week of October 3 (today) we closed at about $89.76/barrel. That's about $18/barrel in less than 4 months.

What I really like about this is the fact that we closed the week below $90/barrel. I would've thought that it might be some sort of psychological support-nope! 

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 Simple Moving Average (SMA, green line), and the 50-day Simple Moving Average (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. As a slight curve ball 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.

As I predicted last week the crude oil chart below with my favorite indicators on it along with the bright white arrow resistance line tell me that we are back in a "SUPER-TREND" down as the 9-day SMA (red line) is trading below the 20-day SMA (green line) as both of these indicators point sharply lower as the crude market itself trades well below the 9-day SMA. Even though the market traded above my bright white arrow trend line, you can see that it wasn't long before the market got smashed and sent lower.
 


Daily December crude oil chart


It is important to note that I believe that right now, on both the daily and the weekly chart the CL market is slightly oversold. However, it is also important to note that markets can remain oversold or overbought for long periods of time in my opinion. Especially if the fundamentals support it.

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 still 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 crude 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. I can also service accounts who are looking to hedge energy prices.

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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/.