Get Ready to Move on Crude Oil

October 2, 2007

We got a bigger than expected head-fake in the crude oil market last week, and that kept us out buying the Nov. 75 puts we talked about on Sept. 25. At the risk of sounding like a broken record, we're going to wait for the energy inventory reports on Wed. at 10:30 a.m. If crude moves lower, we will get into the Dec. 70 puts (which settled today at .51, or $510 each).

November puts expire on Oct. 17, so the market will have to move down fast to make the trade worthwhile. We will therefore buy at least two of the Dec. 70 puts, selling one if Dec. crude hits $75 and keeping the second with a goal of it getting down to $70. For an investment of just over $1,000 we will be looking for a return of $4,000 to $5,000.

Grains Set for Tumble?
Wheat, corn, beans and oats all closed at or close-to limit down today. Some was profit taking off the incredible highs these markets have been seeing (in the case of wheat and soybeans), and a possible glut in supply in the case of corn.

Bill Zechmann, owner of Midwest Futures, came out with a recommendation letter yesterday suggesting the purchase of a Dec. 370 put and a sale (write) of a Dec. 400 call. Unfortunately, the market moved too fast today to get into the trade. When Bill wrote his recommendation you could have got into it for about $450 per contract. Now it would cost over $1,300! With corn dropping 20-cents today, you would be doing the money dance for sure!

We could still play this two ways: first, wait for corn prices to move up and make the spread a little more affordable. Second, since Bill thinks Dec. corn could drop back to the $3.00 range, a Dec. 330 put is trading at 9-cents ($450). These puts would almost triple in price if corn does indeed drop to $3.00.

Why are we bearish on corn? Big supplies and a higher yield as harvest continues throughout the country could see a much higher ending-stocks level than many experts originally thought. There will still be a big battle for acreage come next spring, and we'll quite possibly want to get back on the long side after this upcoming shakeout. For now, we think corn and wheat prices are set for a dramatic drop as the harvest season comes to a close.

Here is a link to a FutureSource story on corn: http://futuresource.quote.com/news/story.jsp?i=DJC00i7Y71002

If you have any questions or comments please send me a note at davidbrown@midwestfutures.com.

Futures and options trading is speculative and involves a high degree of risk. The risk of loss can be substantial. Neither the information presented or any of the opinions expressed constitute a solicitation for the purchase or sale of any commodities.