Options Trading Strategies For Oil

| December 11, 2015 | 0 Comments

OilOptions Trading Strategies For Oil

If you’ve been following the financial news lately, you’ve likely seen a lot of talk about oil.  This time however, it’s not because the price of crude is skyrocketing.  Instead, it’s because oil’s price per barrel has hit multi-year lows.

In fact, West Texas Crude Oil is at the lowest level it’s been at since the financial crisis of 2009.  Minus the financial crisis period, oil hasn’t been this cheap since around 2004.

So what should we expect from crude in 2016?  Keep in mind, I recently said to avoid using bullish options strategies for oil next year.  I definitely think the supply glut will keep prices low for the foreseeable future.

So what options trading strategies should we use?

First, take a look at this chart of crude oil $WTIC over the last year:

chart of $WTIC performance for the last year

The chart of crude oil shows how black gold has done this year.  Prior to the summer, it actually hit $60 per barrel for a couple months.  However, the price has since plunged, and is now trading well below the 50-day moving average.

What’s more, the price of oil is sitting below the $40 mark.  That price seems to hold some significance among oil traders/investors as a sign oil’s bear market will continue.

As I said before, I’m not a fan of oil for 2016.  That doesn’t mean it will stay below $40.  However, a return to $60 or above isn’t likely anytime soon either.

So what options strategies should we consider? 

Given the macro environment for oil, there are a few ways to tackle options trading strategies.  First off, you can trade oil in many ways, including but not limited to oil futures, ETFs, and oil companies.

The easiest way to trade oil as directly as possible is by using ETFs.  However, you do have to consider contango costs associated with commodity ETFs in general.  On the other hand, major oil companies are so heavily invested in natural gas these days, they aren’t pure plays on crude either.

Regardless of what instrument you choose, I believe selling out-of-the-money puts are one good way to make money on cheap oil.  There is still some downside risk, so puts should hold value.  On the other hand, how low can oil realistically go?  There is a floor out there for sure.

On the other hand, using covered calls is a safer strategy to utilize to generate income.  There may not be as much yield upside, but the limited upside in oil itself lends itself well to a covered call strategy.

The key theme is I would lean toward selling options on oil products for the time being.  Even if oil volatility picks up, there isn’t likely going to be a huge move in either direction unless the oil market fundamentals significantly change.

Yours in Profit,

Gordon Lewis

Note:  Gordon Lewis has been trading options for more than 15 years and he now writes and edits for Optionstradingresearch.com.  You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.

Tags: , ,

Category: Options Trading Strategies

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.