How To Profit From These Three Erratic Markets
Monday, August 10, 2009
by Lee Lowell, Futures Options & Commodities Specialist, Smart Profits Report and Editor of Triple-Zone Profit Trader
In the last few columns, we’ve focused on sectors that typically see lots of action during the summertime.
Most notably, this includes the “grains” (corn, wheat, soybeans), the “softs” (orange juice), and even natural gas.
When you have commodities that are so susceptible to weather, you often see dramatic moves in one day, only for it to unwind the next day.
Take corn, for example. Prices rallied strongly early last week on drier than expected weather conditions, only to lose all of those gains by Friday.
But rather than lament situations like these that cause such erratic price movements, they actually offer a chance to profit. As I’ve said in the last few columns, the grain markets make for good speculative bullish trades, as they’re not only at the mercy of the weather, but are also trading at their most recent lows.
If there is a sustained weather disruption, we could see very quick, wild movements. Continue to look at December 2009 or March 2010 call options for the grains that trade on the floor of the Chicago Board of Trade.
Moving on, let’s take a look at the latest in the oil market, which continues to amaze most veteran traders…
Another Erratic Summer For Oil
Cast your mind back to early June…
September crude oil futures hit a high just under $75 per barrel. Then comes word of possible Congressional legislation that would curb speculation in the oil market. In addition, the weekly supply data shows ample reserves of crude oil.
Result? Oil prices tank by $14 to $60.
So instead of looking higher, oil looked like it was ready for a possible trip back down to $30. But this is the oil market - and it’s rarely so clear-cut.
With more “skewed” government reports, which hinted that the economy was improving, that was all oil needed to come roaring back with a vengeance. It quickly added another $11 per barrel to its current price of $71.
Two Ways To Play The Oil Market’s Moves
It would be great if markets always based their moves on fundamental data. Much easier to figure out future direction.
But markets are irrational. And right now, oil is heading higher in the short-term, due to the money flow back into the market, regardless of the deep oil supplies at our disposal. But if you’re looking to make money in the markets, you need to go with what the market gives you, not what you want it to do.
If you’re interested in getting involved in the oil market (long or short), there are two ways you can play it.
- Futures and futures options, which trade on the floor of the NYMEX. Stick with limited-risk option positions.
- The main ETF that represents the oil market and tracks the price movements - United States Oil (NYSE: USO). This is a less expensive way to get in on the action and doesn’t require a commodity trading account to play it.
Currently, USO is trading at $38 per share and has options available, too. If you’re bullish or bearish, pick an option expiration period at least three to six months in the future, as that will give you more time to be correct with your directional call.
Sugar High
Lastly, we want to alert you to the sugar market, which is making extreme upside moves at the moment.
Having kicked off its rapid upward run in April, sugar has ramped up its pace even more in recent weeks, hitting highs not seen since 1981!
I like to call these “blast-off” moves because if you look at the daily chart, you’ll see a straight-up vertical move. Moves like this occur only a few times a year and can happen in any market. They also usually indicate that we’re entering the last phase of the bull run.
What Goes Up Must Go Down… How To Prepare For Sugar Downside
The main reason for sugar’s massive move is news from India that indicates a potentially low crop size.
However, all markets reach a level at some point where the news is factored in. And when we see blast-off moves like this, we can sometimes see a quick and dramatic price turnaround. And in sugar’s case, this would be a reversal to the downside.
If you want to try and capitalize on this, you can buy put option contracts or sell limited-risk call option spreads on sugar - both of which trade on the floor of the ICE/NYBOT exchange. At the moment, October 2009 and March 2010 option contracts are the most active.
That’s it for this edition.
Lee Lowell
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