Commodities Moves: How to Play Them

The last few weeks have seen some dramatic swings in commodity prices, many of them moving double digits in percentage terms in just a very short period of time. Here are a couple ideas on how to take advantage of these swings using options on futures:

Crude oil market: Oil has seen an intense rise in price. Currently, the April futures contract is trading around the $80 per barrel mark. The April contract traded as low as $69.80 the first week of February. A quick $10 move to the upside may not be sustainable, as the market continues to be extremely well supplied, and demand remains questionable. I recommend the following trade:

On a move into the 82 or 83 area, look to sell the April 89 call option for a premium of $700 or better. This option has 26 days until expiration. The crude market would have to break through a huge congestion area to put this trade in jeopardy. Given the above referenced factors, I think this is unlikely. Remember, this trade has unlimited risk above the strike price of the option!

Gold has also seen some big swings. This market is looking bullish to me mainly because it has hung in quite well in the face of a much stronger dollar. Perhaps the dwindling credibility of fiat currencies will continue to propel this market higher, and limit losses on the downside. I currently recommend selling calls at or above the $1,200 level. The April 1210 call can be sold for a premium of around $550 per contract.