Crude oil has been free falling for months now. We had expected this slide and have been waiting patiently for a buy signal. We have now found support very near the 50% fibonacci retracement level. This support should hold this market up and after the slide we have seen a bounce back to the mid fifties could easily materialize just on short covering alone. I know it is hard to buy into a falling market but remember the old saying “buy when there is blood in the streets” well if you look at the doors to the Nymex exchange in New York City you can see blood flowing everywhere.
Eric Bolling, one of the most respected traders at the Nymex said yesterday that he too feels that further downside in Crude is limited at best. Any slide below $50 would almost surly cause OPEC to cut production despite recent comments from Saudi Arabia to the contrary.
This trade is simply the lowest cost way we could find to be long crude for the next month while keeping risk defined to the premium paid for the trade. Even if Crude oil somehow continues to slide below $48 or even lower we never have more than the $400 we paid for the trade at risk.
click on the chart to enlarge
Buy one March 2007 Crude Oil 53 call and buy one March 2007 Crude Oil 59 call and at the same time sell one March 2007 Crude Oil 55 call and sell one March 2007 Crude Oil 57 call, for a combined cost and risk of 40 points ($400) or less to open a position.
Max profit, assuming a 40 point fill, is 160 points ($1600) and occurs with Crude oil trading anywhere between 55 and 57 at expiration. Break even points are $53.40 and $58.60 which means we have a range of $5.20 in which the trade can be profitable.
Max risk, before commissions and fees, and assuming a 40 point fill, is $400. This occurs at expiration with Crude oil trading below 53 or above 59.
Odom & Frey
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