Market: Crude oil, $CL_F, $QM_F
Buy or Sell?: Option values are inflated due to whipsaw trade, sell strangles
Range: Crude oil prices face resistance near $100 and again near $103, support near $92 and $87. We expect prices to remain overall range bound
Friday's rally has turned into Monday's sell-off, but in the end crude prices are going nowhere fast. Our best guess is that risk assets, including crude oil, are putting in a short-term high but we feel like seasonals will keep a floor under the market near about $92 (at least the first time down). Accordingly, we like the idea of selling crude oil strangles using the April options (again).
Specifically, we recommend selling the April crude oil $103 call option and the $88 put, for a combined premium of about $1200. In a perfect world, volatility will fizzle after this week's inventory numbers and we'll get a chance to buy these back early next week at a respectable profit. If held to expiration, the maximum profit of this trade ($1,200 before transaction costs) occurs with the price of crude between $88 and $103. These options have 40 days to expiration.
As always, option selling involves theoretically unlimited risk.