Trading Options in Oil and Energy Markets
3 Key Option Trading Indicators for Oil or Energy Traders
Oct 5, 2009
Oil dropped from over $140 per barrel to under $35 per barrel within several months during 2008. Depending on the side of the market- either long or short- trading options on this move could have been cause for celebration, or an almost total loss. Three indicators were flashing "SELL" when this oil price peak occurred.
Almost no matter where a short option was set, it could have been profitable after this dramatic price drop.
Almost no matter where a long option was set, it was probably unprofitable after this dramatic price drop.
Oil trading offers abundant liquidity because so many commodity traders are active in the energy and oil options and futures markets. Along with the liquidity, one of the most attractive aspects for options and futures traders is the great volatility of the energy markets generally, and oil specifically. Volatility brings profits in both options and futures. Steady markets simply degrade the value of options as the time decay portion of the options premium begins hammering away at the price.
Trading Options and Futures with Moving Averages
Much like the real estate crash, the oil market crashed after the price had reached historical upper limits against the moving averages. Moving averages (MA) assess how quickly a commodity or stock price is moving in a direction compared to its historical price. Commodity analysts have varying moving averages for different purposes depending on short term or long term trend assessment.
The chart below shows the oil price compared to 4, 9, and 50 day moving averages. The longer the moving average, the more extreme the rapid price rise looks. Following the MA will indicate when a market- oil or natural gas for example- have come too far too fast and are ready to change direction or stay within a narrow range.
Relative Strength helps Predict Option Trading Profits
RSI as the Relative Strength Indicator is referred to, highlights how strong the gains and losses are relative to each other over time. Sometimes an oil options trader will place lines on an RSI chart for oil options that suggest when the price has risen too high or fallen too low. While RSI reading can stay in the high area for weeks or months, trading options with long dated expirations will allow for the RSI to correct into the safe zone between high and low lines and make the option trade profitable. The RSI readings are scaled to range from 0 to 100.
Volume Indicators for Trading Commodities through Options
Volume indicators for commodities trading focuses on the commitment of traders (COT) report issued by the Commodities Futures Trading Commission. This is very different from volume indicators for stock trading. Certain traders tend to be on the right side of the trades suspiciously often in the commodity markets. The professional, large speculators are the ones to follow. Learn how to read the COT report accurately and the volume indicators can help decide which side of the trade to be on.
Combining these options trading indicators will move the odds in favor of a profitable options trade.
 |
