Crude Oil Option Derivative Radar: WTI crude
Market surges 5-10%, traders mint money,
Market crashes bears make handsome money,
But what during sideway trends. That's the beauty of derivative strategies and swing trading.
We reiterate crude oil strangles writing at current level would prove to be worthy trading idea as EOD technicals show some sigh of reliefs and stability in prices for trade laggards who have been adamant holding bullish view in this commodity as they must have trimmed leftover money investing in this commodity.
Rationale as to why writing a strangle most suitable at present:
Does anyone dare to expect a drastic recovery in crude prices with steep spikes, answer is never.
Does anyone expects steep decline either, quite possible but seems unlikely given a shorter frame of time. Therefore strangle with deep OTM calls and puts with short time to maturity proves shrewd trade device.
On weekly chart, flurry of bearish candle patterns occurred to break the trend line support at 56.93 levels and then evidenced gap down pattern. This massive tumble has been signified by leading oscillators like RSI and slow stochastic as the bearish convergence formed with steep dips in prices but narrowed volumes. So, we sense with the help of EOD charts a losing streak of prices may halt for a while, during this phase speculators may still extract returns on sideline trades.
Therefore, for little while from now let's be patient and cautious in this commodity. We've devised some shrewd trade idea and formulated strategy for those who can't hold their nerves and is suitable for current condition.
As we expect range bound price bands ($57-$45) we recommend shorting strangles. The reasoning being quite simple where we don't anticipate any drastic change in the prices which means we are taking opposite position and pocket in the net premiums.
The short strangle, which is a neutral strategy in options trading that involves the simultaneous selling of (10%) Out-Of-The-Money call and (-10%) Out-Of-The-Money put of WTI oil and of the same maturity preferably shorter time frame.
The short strangle option strategy likely to derive limited returns to the extent of premiums received from both the side, unlimited risk options trading strategy that is taken when the options trader thinks that the underlying asset will experience little volatility in the near term.
Shorting strangles is credit spreads as a net credit is taken to enter the trade.
