Buy Alert: July 16, 2013

Buy Alert: July 16, 2013

 

Option Strategy:

Buy US Oil Fund (USO) September 2013 $36.00 puts for $0.85 or better.

 

Commodity Outlook:

Crude has really been on a roll over the past few weeks.  The American benchmark price, WTI, has surged $12 a barrel since mid-June.  The recent price explosion has spot WTI trading just under $106 a barrel today. 

However, much of this recent price explosion has to do with uncertainty in the Middle East- not fundamentals. 

In fact, US crude production notched another fresh 21 and a half year high last week. 

Now, there’s no doubt that the US driving season is pushing crude demand to the highest levels of the year.  But big drawdowns in EIA crude stockpiles over the past few weeks have likely priced much of the summer driving season into the market.  US refineries ramped up production in late June and early July to account for this seasonal demand phenomenon.

As far as violence in the Middle East goes, who knows what will happen next…

But what we do know is that the crude market has already priced in a huge fear premium in recent weeks.

All things considered, it’s highly unlikely that crude can trade much higher.  The fundamentals just aren’t there to support oil at $106 a barrel and higher.

Let’s take advantage of this opportunity by buying puts in the US Oil Fund (USO).  As you know, when the price of WTI drops, so does the USO.

Here are the important details you’ll need for this trade…

 

Trade Metrics:

 Here’s a breakdown of the important technical support and resistance zones in WTI crude…

 

Exit Strategy:

Remember, we want the price of oil to move lower.  Our first profit target is the $100 a barrel mark.  If oil can break below that important level, we may see it retest $92.

The risk control line for this trade is at $111 a barrel, which is just above the high set in early 2012. If oil trades above that level, conservative investors should consider closing this trade to keep risk in check.

As you can see, we’re giving ourselves some extra time on this trade.  Buying the September expiration will allow us few weeks of leeway, just in case oil stays elevated a little longer than expected.

 

Category: Commodity Trading