Crude Oil Weekly Round-Up
This week crude oil has been trading in a $3 range from $43.37 to $46.38. Range-bound price action after a directional move is usually a sign of consolidation. The prior directional move took price from a recent low of $37.73 to its most recent high of $49.30. From a technical point of view, for a bull trend to regain steam we would need to see price break-out on the topside of its range and close on the day above $46.38. From a fundamental point of view, it was reported this morning (on Bloomberg) that oil supply, outside OPEC, will fall at its fastest rate since 1992 (an IEA forecast). A reduction in supply may force prices higher. However, the global economic slowdown lead by China may lead to a reduction in demand which may ease upward force on price.
The daily candle-bar chart (below) shows a Bear trend that is still intact. Price is still below the Ichimoku cloud (pink vertical lined area). Although the recent rally that stalled last week at $49.30 may not be over yet. The consolidation area, shown by the price range over the past 4 sessions (blue rectangle area), could lead to more upside price action if there is a close above the rectangle. A continued rally would find a first resistance on the bottom side of the ichimoku cloud at $48.80 and then at its previous high at $49.30. If both are broken then the next strong resistance would be the upside of the ichimoku cloud.
Trading Crude Oil
If you think crude oil price will continue to rally then you may either buy a ‘WTI OIL’ Futures contract, a contract that expires at a certain date in the future, or you can buy a WTI OIL Call option. A Call option gives you the right to buy oil at a certain price until a certain date in the future. The price you fix using an option is known as the strike price.
To buy a Futures contract you must pay a margin and control your maximum loss with a stop-loss order. If oil price falls your loss will increase and/or if there is volatility you may be stopped-out when your maximum risk level is reached. To buy a Call option you pay a premium, no margin or stop-loss is required, your loss is limited to the premium paid and you cannot get stopped-out. Hence the latter trade may be useful in volatile markets when traders want to avoid being stopped-out and want to know their total risk upfront. In both trades as WTI OIL price rises, profit increases (without limit).
The current price of crude (WTI) oil is $45.06 a barrel. The below image is an example Call option trade based on the above technical analysis. It is an option to buy 100 barrels of oil at $46.38 (break-out point) over the next 6-days. It costs 73.40 USD premium to buy this option.
If oil price rises above the $46.38 strike price by expiry the Call option will payout. For example, if price rises to $48.61 ($2.23 above the strike) the option will payout at least 223.40 USD. If oil price does not rise above the strike the option will expire worthless and you will lose the 73.40 USD premium paid at open. These profit/loss scenarios are shown in the below Scenario chart and table over a range of WTI oil prices at expiry.
If you have the opposite view on oil price and think it will fall you may either sell a ‘WTI OIL’ Futures contract or you can buy a Put option. A Put option gives you the right to sell oil at a certain price until a certain date in the future.
Practice trading options on ORE's Web-platform