Crude Oil and Certain Stocks Have Similar Characteristics: Information to Help Create Trading Ideas.

Typically Crude Oil Prices trade on news and plenty of speculation. First there was a steep sell off to the $26 level. Then, Crude Oil had a climb to more than $42 on March, 18th. Short covering and some Long Euphoria had swept into the market. In an article on March 16th I described the overbought conditions in Crude Oil and an Options Trading Strategy to consider, please click the link to review it. When analyzing markets “the trend is your friend” is the adage people follow, but unfortunately, prices typically revert to the mean and markets which are overbought and oversold provide opportunities to implement strategies which can be profitable.

The Chart below provides prices and the Relative Strength Index of some Futures Contacts at post-midnight ET for April 5, 2016 and certain Stocks and ETFs at the 4PM close on Monday April 4, 2016. The numbers should be used for analyzing potential trades. The RSI gives traders an opportunity to zero in on underlying contracts which have characteristics of extremes. It is with this quick analysis that one can seek a strategy which meets its risk/reward requirements. At Options Strategy Network our goal is to help Individuals and Corporations design positions that meet their risk/reward requirements by enabling them to build appropriate positions through the analysis of liquidity, historical and implied volatility, the skew and the best options strategy to meet their goals. Contact us  to structure a program that meets your individual or corporate requirements.

A cursory examination of the Chart below leads to two positions which may be interesting. In Crude Oil, because it is in a potentially over sold state, one could look to establish a One by Two Put Spread in June Crude Oil. This position provides an Implied Volatility advantage because the Implied Volatility is greater than the Historical Volatility and it has a Skew in one’s favor. It involves Buying one June 33 Put and Selling Two June 30 Puts for approximately even money. Unless Crude Oil continues its sharp decline, there are numerous ways to make money on the transaction. The details are in the second chart below. If one believes that Crude Oil will trade below $27 and are uncomfortable owning it there, then this strategy is not for you.

The second strategy involves either getting short Home Depot (HD) or hedging a long position with a Short Options Pairs Strategy. It involves Selling a Call Spread and Purchasing a Put Spread to get short. HD’s Relative Strength of around 90% may be a concern for some.  The strategy provides room for HD to rally without a loss and room for some protection on the downside. It is a limited risk short position with excellent value which provides some downside protection with a strategy which can be far superior to Selling Calls and Buying Puts. Contact us  to see how we can help you build more profitable strategies. Our thirty years of trading and risk management experience can be an excellent addition to your skills.

OPTIONS TRADING INVOLVES SIGNIFICANT RISK AND IS NOT SUITABLE FOR EVERY INVESTOR. THE 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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