Crude Oil is king of the petroleum futures trading market! Here's some valuable hints and kinks taken from actual trading experiences.
Crude oil futures contracts on the NYMEX (New York Mercantile Exchange) is a very liquid market. In the past few years crude oil has been in the news with great price swings. This liquidity and price movement makes it a top-five trading vehicle of the twenty major commodity markets.
Full size crude futures contracts represent 1000 barrels of oil. Required account margin is $4,050 and controls about $60,000 worth of crude. This is about 6% leverage, good faith money down. Each full point move means $1,000. A move from $30 to $40 a barrel equates to a $10,000 profit or loss.
Traders looking for smaller positions or more limited risk can trade crude options and mini futures contracts. A mini-contract is one-half the size of a full contract and is also very liquid. (500 barrels) Two thousand dollars covers the margin for a mini-contract. Recently, the electronic trading oil market has opened up. This is good news for both the longer-term position and day-trader. Stop loss orders will now work for the mini-contract during the entire trading period, day and night.
Coupled with technical analysis, news events can create some good trading opportunities. Crude oil futures and options take a big cue from the inventory reports (API & DOE) that come out every Wednesday at 10:30 am EST. Surprises often occur when these numbers are posted. Selling out with a profit is often a good precaution before these numbers are released. Many times the report is counter to what the market anticipated. The estimates that come out days before the reports are often far off-target. I have known short-term traders who do the opposite of the estimates before the report. Holding a position counter to the anticipated news, they would then liquidate ten minutes after the market had time to absorb the report. This often results in a profitable trade.
In times of geopolitical turmoil, oil can be bought and held until it seems that the end of the world is near. The price top often occurs when analysts are talking about crude going to $100 a barrel. The news services spout dire predictions. At these times it pays to sell out all positions into a big price spike up. Buy back after a sharp decline for a subsequent rally. If the rally lacks power, sell at a double top and go short.
Crude oil futures love to make double tops. Sometimes price action may go past the previous high but will usually reverse after that. Once a top forms, price will sometimes swing in a wide range. This is a great spot for writing crude options at the range edges. The premiums are often inflated and then premium erosion sets in quickly at each disappointment. Don't get caught up looking for a one-way position when there's money to be made writing fat options in a big range. At times, I have seen two month heating oil calls selling for $800 that were twenty points out of the money. These are the times to take notice and research option writing strategies.
Option premiums can get inflated in wild markets, making them over-priced. It's not a place to be buying them. But, if you MUST buy calls, buy them when the market is being completely demoralized on the downside. You will often find some great bargains. You need to buy them DURING the debacle for best bargains because once things stabilize, the premiums can inflate back quickly. Buy put options when the market looks like it can never go down. Buying crude put or call options requires good market timing to minimize your entry and exit spread expenses as well as getting low premiums.
Part Two of Two Parts - Next!
There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.
Thomas Cathey - 27-year trading veteran heads the managed futures division of Thomas Capital Management, LLC. View his market forecast charts and get his complete 44+ lesson, "Thomas Commodity Trading Course - all free." http://www.thomascapitalmanagement.com/commodity/welcome.htm Main site: http://www.ThomasCapitalManagement.com
