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.
As with oil, this market has some significant congestion around the 1150 area that may not be broken easily. The option has 34 days until expiration. On the downside, I recommend selling puts on decent opportunities as they present themselves. I suggest selling puts below the 1065 level. On a selloff, look to sell the April 1030 puts for a premium of $500 or better per contract. Remember, the call carries unlimited risk above the strike price.
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.
At the time of publication, Zeman had clients invested in the call options mentioned in this article
Matt Zeman is a principal with Lasalle Futures Group and chief market strategist for Time Means Money.Com.