The Price Of Oil Keeps Plunging… Now What?

| December 5, 2014 | 0 Comments

oil-crashA few weeks ago, I talked about possible oil trading strategies. At the time, oil was down to $75 a barrel, and it seemed cheap. Since then, oil has plummeted all the way to $65 a barrel, and it may even fall to $60 before all is said and done.

Back then, my advice was to buy long-term calls (or LEAPS) on an oil tracking ETF. That advice hasn’t changed. Those ETF calls will be even cheaper now, but the long-term strategy still holds true. At some point, oil will return to previous levels.

But here’s the thing…

How do we trade oil in the meantime?

First off, the plunging price of crude oil is basically being caused by one factor… oversupply. That is, there’s a huge glut of oil, at least in part due to all the shale oil being produced.

Moreover, OPEC has decided not to cut back on oil production. Because many shale oil operations aren’t profitable below $70 a barrel, OPEC is probably trying to weed out some of its competition by allowing oil to remain cheap.

While this strategy could change, apparently OPEC believes crude oil will level out around $60 a barrel. Is that number safe enough to trade off of? Only time will tell.

Still, using $60 as a bottom (such as for put selling purposes) probably isn’t too risky. Keep in mind, the only time recently oil was below $60 per barrel was after the financial crisis/crash of 2008. And, I don’t see that happening again anytime soon.

So what should we do?

Well, selling puts around $60 isn’t a bad idea. However, this also could be an excellent covered call opportunity.

You see, while I don’t expect oil to drop below $60, I also don’t see it climbing much above $70 either. It’s going to take time to work through the supply glut. And, while supplies are being used up, oil should hover in the $60-$70 per barrel range.

A safe strategy could be to purchase an oil ETF and sell calls equivalent to roughly the $70 mark in crude, or a little higher. In this way, you’ll protect your downside, earn income, and take part in any short-term upside (up to your short strike).

Don’t forget, all commodities can be volatile. But, we may have a predictable range in crude oil for the next few months, at least.

Yours in Profit,

Gordon Lewis

Tags: , , , ,

Category: Breaking News

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.