How to Play Oil in the Wake of Hurricane Sandy, Obama Re-Election

TheStreet.com

NEW YORK (TheStreet) -- Crude oil futures for January delivery, along with other riskier assets, are trading lower today. The markets are trying to sort themselves out following last night's election results, and we are seeing strong risk-off trade this morning.

Now that the election is over, let's not forget about today's Greek vote, which could be huge. One could hypothesize about why the markets are reacting the way they are. I'm not going to bother. We will simply look to deal with the information in front of us and make trading decisions based on it.

Crude has been an interesting market to watch in recent weeks. After trading sideways in the $90-$94 per barrel range, the market finally broke down. The $86 per barrel mark has acted as strong support for the market, and despite numerous attempts over a period of almost two weeks, the market was not able to breach that level to the downside.

Yesterday we saw a very strong rally in oil. There were several reasons for this, including East Coast refining issues following Sandy, the notion of an Obama victory and, therefore, continued QE and a weaker greenback, and finally a strong short-covering rally following oil's failure to break below $86.

How quickly things can turn. As of this writing, the January futures contract is down over $2.50 per barrel in volatile trade.

Looking at the bigger picture, oil does remain a relatively range-bound instrument and should be traded accordingly. However, looking at things unfolding here today, I think downside is more likely than upside. Although it rallied sharply yesterday, oil was not able to break back into its previous trading range, and this can be a good indication that for now the instrument is moving into a lower trading range.

A close above $90 would indicate the market moving back into the previous range. Crude oil inventories will be released a bit later this morning. The market is expecting a rise in inventories of 2 million barrels with a drop in gasoline stockpiles of 1.5 million barrels. Although I do not expect this to be the primary driver of prices today, it could certainly effect trade.

Perhaps more importantly is that volatility has a tendency to rise a bit into these reports. Considering the fact that I still believe this market will remain relatively range-bound, below I will outline one potential way to play it that attempts to take advantage of the current implied volatility in oil options.

In addition, the January crude options only have 38 days until expiration, and therefore may provide an accelerated rate of time decay. Keep in mind that option-selling carries with it unlimited risk and is not suitable for all investors. As always, there are many different ways to structure a position. Positions can be structured with defined risk parameters based off of an investor's risk tolerance, account size, and other factors. Feel free to email me for detailed trade setups. Please note today is Nov. 7, and all trade information is based on the most recent data.

Sell the January crude oil 76/96 strangle for 110 or better ($1,100) day order.

Risk on trade: unlimited.

Profit potential: premium collected minus commissions and fees. As stated above, profit potential is $1,010 after subtracting a $45 R/T commission per contract inclusive of all fees. Maximum profit occurs with January oil futures trading between $76 and $96 at expiration.

Futures and options trading is inherently risky and unsuitable for all investors. Past performance is not necessarily indicative of future results. Stop-loss orders intended to limit losses to certain amounts may not be effective because market conditions may make it impossible to execute such orders.

Commodity Futures Trading Commission disclosure for licensed brokers: This material is conveyed as a solicitation for entering into a derivatives transaction.

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