Option trading oil
Joe Ross' Trading Philosophy
Prices were rising as no one knew how long the war would last. As battles for the Libyan cities raged and towns were taken, lost and re-taken by the opposing fighters, prices were doing a dance. In this sort of scenario, it is extremely important to pay attention not just to the fundamentals, but to the technicals as well. You may have heard the saying: trigger fundamentally, enter technically. What this saying means is that the triggers for direction are the fundamentals the news , while technical plays enable the trader to make the correct entry in the direction of the fundamental trigger.
As it became obvious that the war was going to last for sometime as talks and mediatory efforts broke down, traders settled in for a long ride upwards. But this is where the technicals came to play. In the chart below, we see a double bottom forming at the commencement of the civil war, giving crude a bullish jumpstart. Combining the news and the double bottom formation, a discerning trader would know that the only way crude oil was going was northwards.
GLOBAL OIL & GAS TRADING
This sets up the following binary option plays:. For those who missed the play on scenario 1, the next play would be to wait for the retracement that would surely occur as traders took profits. Plotting the Fibonacci retracement tool from the swing low to swing high, we see this at the Of the two green circles, the second one is the most significant. This is because the first indicates the point of maximum retracement, which forms a key support.
It tells the trader that any other retracements would probably test that support level as well. This sets up the following trades:. The other binary trade types would be too risky to trade in this situation so we leave them out.
Hope this short strategy lesson is well understood. To take profit, you enter an offsetting short futures position in one contract of the underlying crude oil futures at the market price of USD Deducting the initial premium of USD 2, you paid to buy the call option, your net profit from the long call strategy will come to USD 3, In practice, there is often no need to exercise the call option to realise the profit.
You can close out the position by selling the call option in the options market via a sell-to-close transaction.
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Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires. In the example above, since the sale is performed on option expiration day, there is virtually no time value left. The amount you will receive from the crude oil option sale will be equal to it's intrinsic value.
Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable.
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For instance, a sell off can occur even though the earnings report is good if investors had expected great results If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time Cash dividends issued by stocks have big impact on their option prices.
This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative Some stocks pay generous dividends every quarter.
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You qualify for the dividend if you are holding on the shares before the ex-dividend date To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk.