Crude looks rangebound: WTI crude nears 12-week low as Syria tensions ease & Iran attempts to end international sanctions

The Background

Crude has displayed weakness as of late, with tensions in Syria diminishing and Iran seeking to end international sanctions through diplomacy — not to mention the softness displayed yesterday following the unexpected increase in U.S. stockpiles. Our belief that crude will remain rangebound has us placing a short strangle.

The Technicals

WTI Crude Oil Chart

WTI Crude Oil 1Y Daily, courtesy thinkorswim(r)

 

We have seen a retreat down from late Aug highs, when tensions ran high, to the 38.2% Fib retracement level and towards the 200 DMA on average volume. In the near-term, it’s not unreasonable to expect more softness in the underlying, as MACD crosses below its signal line (technical) and, at least for now, turmoil in the middle east is relatively low (fundamental). That said, it appears crude is likely to remain in a trading range over the next several months into the winter. An option strategy that can be used to trade a low vol environment in which one believes the underlying will be rangebound is a strangle, which is detailed below.

The Trade with Risk Profile

Sell Dec ’13 107 Calls (CLZ3)
Sell Dec ’13 90 Puts (CLZ3)

Entry Collected: $1,660 (total)
Dec ’13 107 Calls: $1,310
Dec ’13 90 Puts: $350

Projected Target: We are looking to hold this type of position until, or at least near, expiration, as that is the point at which time value has ticked off the most. This is an open-ended target. 

Stop: Open-ended as long as you carefully monitor the position on a daily basis. If something blows up in the middle east – you have to be prepared to unwind this trade.

Crude Oil Strangle Risk Profile, courtesy thinkorswim(r)

Crude Oil Strangle Risk Profile, courtesy thinkorswim(r)

Selling Dec 107 Calls with 90 Puts gives us a nice wide range in which the trade can become profitable, but remember that you’re position has a lot of Theta, and for it to pay off, you need some time decay.

Postition Management: Follow-up on 10/9 here

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