My Experiences Trading Crude Oil, Gasoline, Heating Oil and Natural Gas Futures and Options – PART 2

Article by Thomas Cathey

Crude Oil is king of the petroleum futures trading market! Here’s some valuable hints and kinks taken from actual trading experiences.

Weather is an important factor for crude oil futures volatility. Hurricanes and blizzards have had adverse effects on prices. Sell out when the prediction looks the worse. Usually the anticipation of the event is worse than the actual event. Hurricane Katrina was a very rare event and on the extreme of the bell curve. Don’t expect moves like that often. Buying crude futures or options for this event turned out to be one of the best trades of the year.

Many oil products position traders like “seasonal tendency” methods and automatically buy oil options early in the spring believing that the demand will increase due to increased driving. It doesn’t always work out this way as the charts will prove. Sometimes prices decline from spring to summer in crude and unleaded gasoline. Indiscriminate buying of options is a sloppy way to trade although this particular seasonality does exhibit a decent probability. Ultimately, trading like this would result in losses due to the expensive premiums paid to hold options for a long period of time. If you desire to make a trade like this, wait until a price debacle to put on you positions. Don’t buy into a rally that could reverse and kill the premiums in your options. When the options are undervalued they present better opportunities.

For additional clues when forecasting crude, always watch heating oil, unleaded gasoline, and natural gas futures. The crude market does not exist in a vacuum. If any of these other oil/gas markets makes a big move, they will probably impact crude oil also. Sometimes natural gas will trade counter to crude oil futures due to price disparities and a whole range of other factors.

In summary, when the TimeLine signals opportunities in the oil products, we like to use futures with an option protection hedge, or buy an option while selling another to help offset the premium expense. In addition, writing crude options (selling for the premium erosion) is a great method because of the often inflated premiums.

Here’s how I look for opportunities in the petroleum markets: First I generate a TimeLine forecast that shows a strong move up or down in a particular energy market. The TimeLine is based on time cycles and other preprogrammed patterns. I then determine if the move is expected to be choppy, trending, and for how long. This helps us focus on possible directional futures/option positions or writing options in a range, or even writing options with the trend.

Next I use automated option software to search for the best of 1600 strategies based on the expected market move. I compare these option to option combinations against futures to options combinations. At some point I will find a compromise between risk, profit and simplicity in one or two strategies. In hindsight there’s