What to trade when Oil rises sharply ?
Posted by adminWell, firstly if you are an active trader and watch the market everyday, you would have know about the Egypt unease, followed by Libya. In fact Libya’s case was more serious.
Now back to Dollars and Cents topic. What could you have done when the prices went irrational ? Back these few days I had put up a few trades some of which would in my opinion, chain effect and trigger other events.
Well first thing first, on Feb 23 I actually Long Crude Oil near the $96 mark, not in the Light Crude Oil Futures, because I do not have access to Futures market yet. Instead of that, I had use ProShares Ultra DJ-UBS Crude Oil (Public, NYSE:UCO) . And on top of that, in order to minimize and set my Loss limits, Options on equities were used. Just speculative, I long 4 Call Options, held over night, was happy when Oil prices touch at $103. Then I cut it at $100 on Feb 24.
Its a great tool when you are uncertain and want extra leverage when you have the odds. Well even so Saudi Arabia had enough Oil supplies to cover Libya, we all know humans are irrational. (I was lucky to set stop loss at $100 when there were rumors Libya governing leader was shot. Prices came crashing down after that.)
Now next few stuff you could look at when Oil prices goes higher.
Short companies that relies on Crude Oil
Not to mention any stock tickers here, but generally you could open small Sell Short positions on some of the worst performing companies in these industries
- Airlines
- Logistics (DHL / Fedex similar)
- Any other industries you know off that relies heavily on Oil Prices as expenses
Probably for starters or other investors, we should look at things in a few ways.
Fundamentals – The fundamentals suggests that if the higher the Oil prices, the higher the cost of operating a business. And as such, profits are being eaten into, and thus results in lower earnings. Also you definitely wouldn’t want to short an airliner / air carrier company that’s in the Top 3 in the US or Europe Business.
Technicals – Just based on technical charts, you wouldn’t want to short a stock that has gone in a steady nice uptrend. Why ? Because it suggests that this company might be doing great, and would be able to overcome this Oil price increase. Short a company that has been holding and having a downtrend.
Quantitative trading – Well, I made this up. Yeah you have shorted a stock, odds were in your hands. You had a 5% gain and now what ? Other other traders and investors would be probably buying Puts Options to protect their positions. Now if you are happy with the gains, sell or write puts instead, forming a Protective Put strata. You have just limited your gains, but at the same time, gaining extra profits should the price stay in that range.
Or yes Quantitative again – What if you could “hedge” against these short(s) positions ?
What about going Long on Companies on that relies on Oil prices to profit ?
Long companies that relies on Crude Oil as products
Now you have your shorts, and you have Money, I mean real hard cash in yer account. Now use this to Long.
- Oil product sellers
- Oil Miners, productions
- Any other industries you know off that relies heavily on Oil Prices as income
Some examples Exxon, BP, Stone Energy.
Fundamentals – The fundamentals is simply that if last week, I am selling a product for $5000, and suddenly, by doing nothing, I get to sell a product at $6000 without incurring extra expenses, that is what I call free “Profits”, and it just happened to Crude Oil commodity asset class.
Technicals – Just based on technical charts, you name it. Buy in some of the best companies, and they simple go higher. I seriously would be blind-folding myself and buying in.
Quantitative trading – Well I don’t see any in this deal, except probably you could use Call Options to trade up, or simply, by hedging the Short positions for these Long.
Well I guess you have to practice until it becomes nature and react fast enough. Oh yea, Happy trading !