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Title: My Experiences Trading Crude Oil, Gasoline, Heating Oil and
Natural Gas Futures and Options - PART 2
Author: Thomas Cathey
Article:
Crude Oil is king of the petroleum futures trading market!
Here's some valuable hints and kinks taken from actual trading
experiences.
Weather is an important factor for crude oil futures
volatility. Hurricanes and blizzards have had adverse effects on
prices. Sell out when the prediction looks the worse. Usually
the anticipation of the event is worse than the actual event.
Hurricane Katrina was a very rare event and on the extreme of
the bell curve. Don't expect moves like that often. Buying crude
futures or options for this event turned out to be one of the
best trades of the year.
Many oil products position traders like "seasonal tendency"
methods and automatically buy oil options early in the spring
believing that the demand will increase due to increased
driving. It doesn't always work out this way as the charts will
prove. Sometimes prices decline from spring to summer in crude
and unleaded gasoline. Indiscriminate buying of options is a
sloppy way to trade although this particular seasonality does
exhibit a decent probability. Ultimately, trading like this
would result in losses due to the expensive premiums paid to
hold options for a long period of time. If you desire to make a
trade like this, wait until a price debacle to put on you
positions. Don't buy into a rally that could reverse and kill
the premiums in your options. When the options are undervalued
they present better opportunities.
For additional clues when forecasting crude, always watch
heating oil, unleaded gasoline, and natural gas futures. The
crude market does not exist in a vacuum. If any of these other
oil/gas markets makes a big move, they will probably impact
crude oil also. Sometimes natural gas will trade counter to
crude oil futures due to price disparities and a whole range of
other factors.
In summary, when the TimeLine signals opportunities in the oil
products, we like to use futures with an option protection
hedge, or buy an option while selling another to help offset the
premium expense. In addition, writing crude options (selling for
the premium erosion) is a great method because of the often
inflated premiums.
Here's how I look for opportunities in the petroleum markets:
First I generate a TimeLine forecast that shows a strong move up
or down in a particular energy market. The TimeLine is based on
time cycles and other preprogrammed patterns. I then determine
if the move is expected to be choppy, trending, and for how
long. This helps us focus on possible directional futures/option
positions or writing options in a range, or even writing options
with the trend.
Next I use automated option software to search for the best of
1600 strategies based on the expected market move. I compare
these option to option combinations against futures to options
combinations. At some point I will find a compromise between
risk, profit and simplicity in one or two strategies. In
hindsight there's always a best strategy we could have used.
Keep this is mind when narrowing down the choices. When
finished, we want to have one or two potential trades to work
with. We call the selected few, "high probability, low risk
trades."
Remember there is more to planning a trade than just coming up
with a forecast. The market may move as predicted but we can
still lose by choosing the wrong trading vehicles. Pick the
right vehicles and strategies that will allow us to stay in the
market without excessive fear, but still carrying calculated
risk.
We NEED to take on calculated risk or the market will not pay us
for our services. In addition, the vehicle has to move far
enough to make a profit without letting the expense of
protection eat us up. Excessive protection (risk avoidance) can
come in the form of option premiums, too close-in stop loss
orders - and overdone, complex spread strategies. Matching a
forecast to a strategy is an important skill to succeed in
commodity trading.
Good Trading!
There is substantial risk of loss trading futures and options
and may not be suitable for all types of investors. Only risk
capital should be used.
About the author:
Thomas Cathey - 27-year trading veteran heads the managed
futures division of Thomas Capital Management, LLC. View his
market forecast charts and get his complete 44+ lesson, "Thomas
Commodity Trading Course - all free."
http://www.thomascapitalmanagement.com/commodity/welcome.htm
Main site: http://www.ThomasCapitalManagement.com
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