How to Play Crude Oil's Run

Given the recent run-up in crude prices -- 10 days in a row -- the market will likely have to take a break before another possible leg higher. Here is how to play it:

Sell calls on the March crude contract. I like the March 93 call for $850.00 or better. This call gives plenty of cushion between the strike price and current market. The call has a delta of 18, so it will move only approximately one-fifth of the move on the underlying futures contract.

This option has 41 days until expiration. Having been up 10 days in a row, the call premiums are really pumped and will deflate quickly on a selloff. Just remember, this type of trade carries with it unlimited risk.

Buy puts. I like the March 80 put at a premium of $200 or better ($2,000.00 per contract.) This put has a delta of approximately -32, meaning it is the equivalent of holding one-third of a short futures contract. The lower the market goes, the more the delta increases. The point is this put is close enough to the current market to potentially show a quick profit on a decline in prices or a spike in volatility. Plus, with 41 days until expiration, we are giving the market time to digest the recent gains and see a pullback develop.

If one chooses to sell the call, time is your best friend. As theta kicks in, the option will decay until expiring worthless. If one chooses to buy the put option, time is your enemy. Therefore, for investors looking to get into the market with defined risk through the purchase of these puts, I recommend that the options be held no longer than the seven to 10 days. If the move does not develop in that time period, it is better to save premium and go onto the next trade.

Risk disclosure: Past performance is not indicative of future results. The risk of loss in trading futures and options is substantial and such investing is not suitable for all investors. An investor could lose more than the initial investment.

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