Oil Volatility Makes for Tactical Trading

NEW YORK (TheStreet) -- The oil market continues to provide decent trading opportunities.

Last week I wrote of this market being range-bound and how to play it. After testing the low end of the range, the market has snapped back with a vengeance and is right back in the middle of the range.

As of this writing, December crude oil futures are trading at $93.60 per barrel. After trading a bit lower earlier this morning, it seems the market is intent on adding to yesterday's strong gains. This market appears to be trading in equilibrium.

So far there has not been a catalyst to drive crude out of its trading range. Barring any geopolitical events, I do not see this changing any time soon either. Due to the holiday on Monday, the weekly EIA petroleum status report will be out during Thursday's session. Whether this moves the market remains to be seen. Analysts are looking for a build in crude inventories of 1.5 million barrels as the global economic recovery continues to sputter.

The notion of lower demand, however, has been counter-balanced by ongoing tensions in the Middle East. One could also argue that all the recent volatility we have seen in oil is the market attempting to confirm a near-term bottom at the low end of the recent range.

The volatility of crude oil options has been on the rise. Looking at a chart of the CBOE Crude Oil Volatility Index (OVX), this index has been trending to the upside recently, trading down near the 32 area on Oct. 2 and trading as high as 35 and change yesterday. The 35 area has proven to act as resistance on previous tests.

The fact that the market price looks to be balanced here along with the rise of volatility into resistance could potentially make this an attractive premium selling opportunity. Please note today is Oct. 10 and trade information is based on the most recent data.

Below I will outline a short strangle strategy. Keep in mind that this position carries unlimited risk. An investor may lose more than his original investment. There are many other ways to collect what I feel may be overvalued option premiums in this market. Feel free to contact me for details.

Sell the December crude oil 82/107 strangle for a credit of 92 or better ($920).

Risk on trade: unlimited.

Profit potential (the premium collected minus applicable commissions and fees): In this case, maximum profit potential at expiration is $870 after subtracting a $25 r/t commission inclusive of all fees on two contracts. This maximum profit potential is reached with December crude oil futures trading between the break-even levels of $82.87 on the bottom and $106.13 on the top. December crude oil options expire on Nov. 13 and have 35 days until expiration.

The position may be closed any time prior to expiration with a gain or loss depending upon market conditions.

Please note: Futures and options trading is inherently risky and isn't suitable for all investors. Past performance isn't indicative of future results. Stop-loss orders meant to limit losses may not be effective because market conditions may make it impossible to execute such orders.

Matt Zeman is a trader at Kingsview Financial. He began his trading career as a runner in the grain pits at the Chicago Board of Trade before becoming an arbitrage clerk. Eventually he started trading equity options and stocks. Matt now is a full-time futures broker. He has been a frequent guest on CNBC, Fox and Bloomberg, and provides his views on the stock, bond and futures markets for financial media including Dow Jones, the L.A. Times and The Associated Press. Matt is a member of the Chicago Board of Trade, and carries series 3, 7 and 66 licenses.