Could a Delay in Iran Deal Stop Oil From Falling?
The price of oil has been declining since June, now trading at 42.05. The top reason and concern is oversupply. There are few assumptions as to when and what pace will Iran return to the oil market during 2016. Analysts have mixed forecasts between the first half of 2016, second half and later this year. The general market seems to expect more supply from Iran in the first half of 2016 and therefore a delay in supply from Iran may result in higher market volatility and may halt the decline.
Price of crude oil in the last month:
On the news front, tomorrow the EIA (energy information administration) will release its weekly report indicating oil demand. The report measures the change in crude oil stock and if there are more demand (buyers) for oil than there is supply for a given period, stock will decline. If demand rises, it may have a positive effect on the price of oil and vice versa.
To trade the movements in the price of oil before tomorrow’s data, you may purchase options. By purchasing options you are limiting you risk to the option’s premium and potential profit is greater than premium paid. Below are two position alternatives to trade either an upward or downward trend, depending on your outlook.
Position 1 - Demand to increase and Oil price to rise
If you expect the EIA report to show an increase in demand you may trade an upward price trend through buying a Call option contract on oil. A Call gives you the right to buy oil at a certain price (the strike) until the option expires. The example below is a Call to buy 100 barrels at 42.08 (or 0% from current market) until 21st August (3-days time). Note that the 42.08 price we are reserving is known as the 'strike' and the more the price of oil rises the more this strike can beat the market making the option more valuable.
To enter this trade it will cost a premium of 74.92 USD. The open premium is also the maximum risk hence you do not need to utilize a stop-loss order.
If the price of oil rises above the strike (42.08) the option will payout; if oil rises above 42.83 by expiry at least 100% profit will be made and if oil rises above 43.58 at least 200% profit will be made. If oil does not rise and remains trading below 42.08 a loss will be made, this is limited to 74.94 USD.
Position 2 - Supply to increase and Oil price to fall
If you expect the EIA report to show an increase in supply you may trade a downward trend through buying a Put option. A Put gives you the right to sell oil at a certain strike price until the option expires. The example below is a Put to sell 100 barrels at 42.08 (strike) until 21st August (3-days time). This strike becomes more attractive as the price of oil falls.
To enter this trade it will cost a premium of 74.75 USD.
If the price of oil falls below the strike (42.08) the option will payout, if oil falls below 41.33 by expiry at least 100% profit will be made and if oil rises above 40.58 at least 200% profit will be made. If oil does not fall and remains trading above 42.08 a loss will be made, this is limited to 74.75 USD.
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