The Heating Oil has pulled back quite a bit with the rest of the energy complex. Seasonally we are entering into peak demand for heating oil. While the pull back in energy has been welcomed by consumers, producers are anything but happy. OPEC recently made a statement saying that the recent fall off in price is a concern and is hurting OPEC member nations. This statement is one that usually precedes a production cut.
Technically this market is oversold and the Commitment of Traders data shows that small traders have now rolled over to a short position in heating oil. As I have said in past trades these small traders provide the fuel that will drive prices higher. We are also seeing many technical indicators like Stochastics issuing buy signals at the current time. Add all these factors together and we feel that a long trade in energy is more than warranted. We are getting a solid risk to reward ratio with this trade and at the same time a large range within the price of heating oil that we can profit in.
click the chart to enlarge
Buy one November 2006 Heating Oil 175 call and one November Heating Oil 195 call, and at the same time, sell two November 2006 Heating Oil 185 calls for a combined cost and risk of 200 points ($840) or less to open a position.
Max profit assuming a 200 point fill is 800 points ($3360) and occurs at expiration with Heating Oil trading at 1.85. Partial profit occurs with the Heating Oil trading anywhere between 1.77 and 1.93(break even points) which means we have a range of 16 points that we can profit in!
Max risk, before commissions and fees, and assuming a 200 point fill, is $840. This occurs at expiration with Heating Oil trading below 1.75 or above 1.95.
Odom & Frey
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