As of 6/26/2012
From time to time I will throw out a trade idea I like for whatever reason and will monitor it or update any thoughts or hedging ideas I have throughout the life of the trade. With all that has gone on in Crude oil recently in my opinion there are juicy premiums embedded in options prices and I think we are in for range bound trading up until next Friday and the NFP number.
For the purpose of this trade I will look at selling the August $82-76 strangle in Crude using the bid as of 3:30 EST pm today. I'd like to think that for the time being Crude around $80 (futures are currently $79.35) is in a "sweet spot"/comfort zone in terms of all interested parties involved (producers/consumers). The August 76 put is $1.11 bid and the 82 call is $1.21 bid (we're selling both so obviously we use the bid price). Our maximum profit is $2,320 minus all fees if Crude settles between $82 and $76 a barrel on July 17th but I am not looking for a home run here, just a base hit or a double. There are 22 days until expiration but until next Friday's unemployment number there are 10 days (so about half the days left till expiration with 4th of July being a holiday trading session).
The maximum downside risk is unknown obviously because anything can happen in the price on any given day, but I know my breakeven prices on the trade are at $74.89 and $83.21 a barrel at expiration. I will revisit this trade next week or when appropriate to offer up hedges in case the trade starts moving against us too strongly in one direction. I also like the fact that the put and the call have about the same value with crude futures trading right around $79 a barrel which tells me the market is split on if there is more risk to the upside or downside. For clarification I took the call $3 above the futures price (approximately) and the put $3 below the futures price to get an even barometer of the market. I don't have a crystal ball so we will have to wait and see how right or wrong I am but just a trade to watch and monitor.
Lastly I will not be looking to extract all the premium out of this trade but will be content with approximately 25% ($600) on this trade as "you can never go broke taking a profit." I have included an hourly chart below which include the lines of the 2 calls I suggested selling ($82 & $76) and the approximate breakeven lines ($83.21 & $74.89). I will now go and sing Kumbaya and pray that nothing crazy happens in Crude in the coming week.
Risk Disclaimer: The opinions contained herein are for general information only and are not intended to provide specific investment advice or recommendations and are not tailored to any specific's investor's needs or investment goals. You should fully understand the risks associated with trading futures, options and retail off-exchange foreign currency transactions ("Forex") before making any trades. Trading futures, options and Forex involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge and financial resources. You may lose all or more of your initial investment. Opinions, market data and recommendations are subject to change without notice. Past performance is not necessarily indicative of future results.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.