Skin in the Game
Market: $CL_F January Crude Oil Futures, CLF13
Buy or Sell?: Sell the $100/$72 January crude oil option strangle for about $1,150
Range: We think crude oil could slide into the low $80s but feel like it will find support; the futures price should stay between $72 and $100 in the coming 6 weeks
Chart:
The Premise of the Trade:
Crude oil futures have fallen about $9 in four days; the volatility looks to be opening the door to an opportunity to sell January crude strangles at inflated prices. After all, the weak supply and demand fundamentals can be quickly offset by Middle East turmoil or even government stimulus. In other words, we don’t see any compelling reason to expect crude oil prices to experience one direction trade. Instead we believe technical support near $85 and then again near $80 should provide an environment for consolidation. As a result, we like the idea of selling the January crude oil 100/72 strangles for about $1.15 in premium, or $1,150. If held to expiration, the max profit on this trade ($1,150) occurs if the market is between $100 and $72. These options have 53 days to expiration, we believe that the quickest premium erosion in crude oil options begin under 50 days.
This appears to be a rather high probability trade, but of course any time you are selling options naked there is theoretically unlimited risk. We estimate the margin on this trade to be about $1,800.
Thanks,
Carley Garner
DeCarleyTrading.com
Futures, Options, Integrity
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