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How to Take Advantage of Contango and Get Short Crude Oil at Good Levels
There are numerous articles these days about the near record
stocks of crude oil and refined products in storage. As of the last Energy
Intelligence Agency’s This Week in Petroleum Report, U.S. commercial crude oil stocks
were at 361.707 million barrels not that far below the 2009 all time record of
375.258 million barrels reported on March 1st 2009. If sluggish growth
continues and unemployment in the third and fourth quarters are worse then
expected, we may see crude stocks get very close to the 375.258 million barrels
record benchmark. Here is a strategy to take advantage of the current
October/December crude oil spread without being in the storage business. Last
night October Crude Oil Settled at 74.09, while the December contract Settled
at 77.47. That is a large carrying cost. Here’s the transaction I propose for
those of you who are interested in getting short Crude Oil.
In order to take advantage of not only the two month calendar
spread which is priced at 3.38 and the volatility skew in Crude Oil which, as
you can see from my statistical review published earlier today, is
substantially sloped to the put side, we can Sell a Call Spread and Buy a Put
Spread to initiate a position with Limited Risk and a Black Scholes Advantage.
Based on last night’s December Crude Oil Settlement of 77.47 I recommend
Selling the December 80/83 Call Spread at a Settlement Price of 133 tics and
Buying the December 75/72 Put Spread for a Settlement Price of 100 tics. The
spreads are both about $2.50 from the initial strike price but the Put Spread
takes advantage of the skew to price the OptionsPairTM at an excellent level.
This is a low risk strategy with a loss potential of less
than $3,000 with commissions and a profit potential of slightly more than
$3,000. It gives the trader the opportunity to take advantage of the market’s
spread differentials as well as its inclination to price options comparatively
more expensively as they go farther out of the money.
If you have any questions call me at 347-949-4546 or email me at fred.oltarsh@libanman.com. Some of
the content of this article was provided by energy risk strategist Jed
Counihan.
FUTURES AND OPTIONS TRADING INVOLVES SIGNIFICANT RISK AND IS NOT SUITABLE
FOR EVERY INVESTOR. INFORMATION IS OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE,
BUT IS IN NO WAY
GUARANTEED. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS
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lets think, whats more valuable, oil in finite supply or little pieces of paper with green writing on it in infinite supply?
"This is a low risk strategy with a loss potential of less than $3,000 with commissions and a profit potential of slightly more than $3,000."
THIS is low risk? We are risking $3000 with the "potential" of making $3000?
No thanks! I'll just continue to trade at inflection points where the downside is limited -- and the upside ISN'T!
Get short somepin that correlates .8 to spx no on ur life bro - Bam Bam and Ben and Turbo Timmy want spoos on the moon thats what the will get
Lolz, does this guy/gal understand that crude oil metaphorically speaking, is cylinder 6 - 12 in the economic reflation engine?
Translation:
aren't options controlled by the govt?
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