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Puts And Calls To Play Volatile Oil
Special Edition: The Smart Profits Report Oil Forum
The Smart Profits Report: Issue #310
Friday, May 19, 2006
Puts And Calls To Play Volatile Oil
by Lee Lowell
Advisory Panelist, Mt. Vernon Research
From a trader’s perspective, I certainly can’t see oil heading back down to $40 a barrel. With all the tensions in the Middle East, including the war in Iraq and Iran’s nuclear program, oil will be propped up for the intermediate future.
It’s not so much whether these tensions actually will cause a disruption in oil flow, but more the mere fact that it can cause a disruption that will keep oil prices high. Even though oil is at historically high levels, if it’s justified in the market’s eyes, then it will stay there. And remember, there are a plethora of large institutions and hedge funds invested in this market that will do all they can to protect their long positions.
Obviously, this is an extremely volatile market, with much more risk than usual. The best way to get involved is to take a small position and use limited-risk strategies. I would stay away from playing pure oil futures and use futures options instead. You can buy outright calls or puts, depending on your prediction, and use option spreads to further reduce your risk. Give yourself plenty of time if playing futures options. And remember, you can pick option expirations many months into the future.
If you want to play the energy sector via stocks, you can trade the oil ETFs, or some individual energy stocks. Once again, use option orders to limit your risk. I don’t like playing individual stocks so much, especially if you’re going to use stop loss orders. In such a volatile market, there are many occasions I’ve seen a stock gap open lower or higher than your stop-loss level and fill you with a much worse price.
Good Trading
Lee Lowell
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