We Get Our Crude Oil Drop

August 6, 2007

As we expected, we finally got our big drop in crude with Sept. falling nearly $3.00 today. Worries about a slowing economy thanks to the sub-prime mortgage debacle continues to be one of the published reasons.

The real fuel for the fall, however, were the large long positions many hedge funds were holding. And they decided to get out big today. Remember, we are short-term bears on oil. We want to protect our profits on the 70 Oct. puts and step back to the sidelines for the next play. Besides, if the reason for price fall in crude was because of the so-called slowing economy, then why was the Dow up nearly 300 points today?

The plan: Our goal is still for crude to drop to the $70 level. Wednesday morning is when the weekly oil and gas inventory figures are released, and that day is often very volatile for energy futures. We recommend putting a tight stop on 70 Oct. puts. They ended the day at $1.88 each, so if you got in at around $1.00 you've almost doubled your money. Volume in the 70 Oct. put options is still brisk - nearly 700 contracts today - and this strike price has the most open interest of any Oct. crude put option. Place a stop on half your option contracts at $1.50 to lock in a profit if the market takes a big reversal Tuesday or Wednesday. Keep the other half of you contracts open.

When crude does hit $70 sell half your contracts and protect the rest with a modest stop-loss. Crude might continue down into the mid-sixties, or it may take a sharp bounce back up. If that happens, make sure your stop is at a level where you will get a nice return.

OJ Watch
OJ continues to drift sideways as there is no new weather news to roil the market. There is solid resistance at the 143 mark for Nov. OJ, but we're going to stay on the sidelines for now with this trade.

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.