Oil & Gas 01 (May 08 - Jul 08)

[kennynah]

i agree....the biggest question is "when"? this is the million $$ question...

[HengHeng]

well issue is we can't but at least we can anticipate and reduce our unneccessary risk.

[kennynah]

ok...just so this becomes a more meaningful discussion...and i dont have Oil as a tradable product for me... but i know u have...

so i need your help to put up some IV figures for the following options, so that we can see what strats we can use here...

Jul, Aug Calls and Puts....strikes at 135, 140, 145, 150...or if u like, even 200 strike

[HengHeng]

well it really depends on where you think prices might go to. And i mean "might". Pure option strategies often includes complex calculation which involve real times prices which you might be able to help me. Basically i'm too lazy to check out the prices. I'm not v good in greeks as well.

Basically you can always use a combinations of options to "hedge"

One can buy simple "put" options in just to "hedge" if he isn't comfortable to employ strategies.


1. Assuming one is thinking prices will not stay at 135 and will either go up/down sharply.

One way is just a simple buy a "Put" option with exercise price probably somewhere around 130(might be quite exp) and a "Call" at 140. This would cost you quite an amount of premiums should be in regions of 20 bucks.

This to me is one way if you are unsure whether if it is going up or down. It is just buying insurance. Reduces your risk exposure as compared to entering into futures contracts.

2. IF one is darn sure that oil might not go above 150/below 100 we can always write options on top of whatever that has being bought to reduce the amounts you need to pay for the premiums (those that you have bought).

The strategy would be writing call options at around 145( meaning you would sold your oil contract at around 150 after adding premium) and put options at 110( why 110 and not 100 usually it is much more liquid but premiums collected would have pulled your "buy back" price down to around even if exercised.

So assuming if market goes your favour you would be able to sell your "in the money" options for much higher premiums as compared the amounts you have bought. Of course i would usually pick 2 month away from the contract which is currently trade as it usually offers the most worthwhile premiums.

(By the way you can sell 200 strike calls if you want as well though i'm pretty sure they are pretty cheap)


OF course they are many other strategies , the one i've illustrated is just a simple option strategy and might not be what i'm using currently as i do futures contracts as well and combine with other stuff for instance buying oil related stocks as well.

By the way i would like to warn newbies never to "overtrade" on options which are so evident in almost all freely/options students.

Don't think you can be the "champion" just because you got lucky and got hit on some trades in which he has done. If he is really that good why does he need to teach? Reason why ? Options markets are a very biased market , it is sometimes affected by volumes(control by instituitions and market makers) and sometimes doesn't follow the normal formula in prices delta or vega. I have seen far too many people which lose their money to options thinking they can outsmart the elite in the markets.

My suggestion , keep ur strategies as simple as possible. Complex strategies don't really work unless you know what you are doing through years of trading and not by reading books or attending certain seminars .

[kennynah]

well it really depends on where you think prices might go to.

definitely....it's not just for options...it's for any trade...determining the direction is #1 step...

One can buy simple "put" options in just to "hedge" if he isn't comfortable to employ strategies.

that's provided one already has a LONG oil position that is showing profits...then this "hedge" will be meaningful. otherwise, a LONG Put, simply is betting that Oil will drop in price.

1.Assuming one is thinking prices will not stay at 135 and will either go up/down sharply.

One way is just a simple buy a "Put" option with exercise price probably somewhere around 130(might be quite exp) and a "Call" at 140. This would cost you quite an amount of premiums should be in regions of 20 bucks.

This to me is one way if you are unsure whether if it is going up or down. It is just buying insurance. Reduces your risk exposure as compared to entering into futures contracts.

this in option trading term, is known as a LONG Strangle....where, one makes money if by expiration, the price of Oil will either go further below 130 or go higher than140.... as you rightfully guessed, it is likely that the premiums for these Call and Put options will be high.... especially given such heightened volatility and that these are both very likely @ ONE strike away.
for ~2.5 weeks now, Oil has been trading in this range (ie 130 to 140).... if someone, had actually bought this 140Call130Put, this fella will be haemorrhaging now, big time...
BUT of cos, like you said, if one expects oil to trade outside of this range, one can LONG this Strangle but purchase Aug or even Sept month expiration, but nothing is for free...the premiums are even more expensive than the front month options.

2. IF one is darn sure that oil might not go above 150/below 100.............. we can always write options on top of whatever that has being bought to reduce the amounts you need to pay for the premiums(those that you have bought).

there are actually 2 parts to what you wrote above...
a) SHORT a Strangle (ie write a 150Call and 100Put) .... but I am guessing, that the premiums received wont be that enticing. Becos on the topside, 150strike is probably 3 strikes away and on the bottomside, it is probably 7 strikes away.... the premiums wont be high.... maybe the probability of Oil touching either end (especially the lower end) is low... the event that Oil shoots well past $150 makes writing this Strangle, perhaps unjustifiable.... tio boh? it boils down to risk vs reward.... not to mention Oil at > $135, the margin requirements will likely be prohibitive for most retail investors, even if it is just 1Call+1Put contract.

b) yes, this is a very good idea....it is indeed a "hedge" by writing a Call of perhaps $140 onwards...if one has earlier paid for a lower strike Call (eg 120 Call). This 2nd leg in, makes this spread, a BULL Call Spread. The plus side is, one collects premium from selling a Out-of-The-Money Call option (eg 145Call) and thus lower the earlier option premium paid on the 120Call....or perhaps, even making it a "Free Trade" situation, IF the collected premium = or > earlier 120Call premium paid...and highly likely, since this 120Call is now at least $15 In-The-Money....
In fact, I would suggest this option strategy, becos, then however Oil moves from now onwards, it does NOT matter. it is a 100% hedge.
BUT, the trade off is, IF Oil powers strongly beyond $140 or $145, then there is no more upside profit potential... option trading is really a reflection of life.... there is no FREE lunch.... one gains some, one is bound to lose some..and more..sometimes..

The strategy would be writing call options at around 145( meaning you would sold your oil contract at around 150 after adding premium) and put options at 110( why 110 and not 100 usually it is much more liquid but premiums collected would have pulled your "buy back" price down to around even if exercised.

we discussed this...this is SHORT Strangle 145Call 110 Put... to reiterate, one sells a strangle becos one expects the price to be ranged bound....hence, if we are expecting large movements, this is not an appropriate option strategy.

So assuming if market goes your favour you would be able to sell your "in the money" options for much higher premiums as compared the amounts you have bought. Of course i would usually pick 2 month away from the contract which is currently trade as it usually offers the most worthwhile premiums.

of cos, if one simply long or short an option and it makes money, then simply close off. however, we are exploring how to take advantage of an expected big swing in Oil price. taking Long or Short one sided, means, we must determine ONE directional bet. perfect, if the price move in the correct direction....and it's Hong Kong, if price moves in opposite direction...worst is it is a naked SHORT option position...expect margin call.

(By the way you can sell 200 strike calls if you want as well though i'm pretty sure they are pretty cheap)

i would think so too....maybe5 cents...for the amount of margin requirement, it would not be ideal deployment of funds.

OF course they are many other strategies , the one i've illustrated is just a simple option strategy and might not be what i'm using currently as i do futures contracts as well and combine with other stuff for instance buying oil related stocks as well.

i totally agree.... many many strategies...think until balls big big...
some people, LONG futures and hedge it with a covered call...collect monthly premium...like income...provided the future contract is far out enough...some people trade Delta Neutral by shorting enough Calls to equal 1 future contract...but agan, margins needed.

By the way i would like to warn newbies never to "overtrade" on options which are so evident in almost all freely/options students.

this is very very good advice.... i have lost plenty becos of this before....this is FREE of Charge advice here...dont try ...i guarantee you, you cannot win by overtrading...expecially large contract sizes...the commissions and theta will kill...mercilessly.

Don't think you can be the "champion" just because you got lucky and got hit on some trades in which he has done. If he is really that good why does he need to teach? Reason why ? Options markets are a very biased market , it is sometimes affected by volumes(control by institutions and market makers) and sometimes doesn't follow the normal formula in prices delta or vega. I have seen far too many people which lose their money to options thinking they can outsmart the elite in the markets.
My suggestion , keep ur strategies as simple as possible. Complex strategies don't really work unless you know what you are doing through years of trading and not by reading books or attending certain seminars

this is also a fair statement.... statistically, a very large % of options traders lose money in the long haul....especially retail traders.... the folks at the exchange PITs....also known as Professional Option Traders, have an edge that retailers will NEVER have... they dont lose slippage(meaning they dont pay MORE than what an option is valued at), they pay a significantly lower commission, they hear news that we dont smell.... they eat, burp, shit, sleep, dream and have sex with Implied Volatility and their girlfriends are always Greeks...
anyone who is serious about option trading needs to theoretically comprehend Implied Volatility like one's life depended on it.... then, one needs to know how the greeks impact the premium of options...again like fish taking to water
easier said than done....one can complete the University of Options and still will be clueless on how to trade options (like me)....becos, beyond the science/mathematics, then there is the Art of trading options...
when one completes the theory lessons, and have paper traded long enough, then one can try out a 1st real trade on ONE contract size
but seriously, option trading, like any skill, takes plenty of time to hone.... dont rush it...the pot of gold has been there, is there and will still be there...there's no need to rush....
knowing that almost all option traders will lose money within the 1st year, see to it that one sets aside an affordable sum of tuition fees...the market demands payment for real lessons....hence, NEVER commit the entire investment capital from the start... becos, later, no money, no honey babe...


H2, thanks for this opportunity to discuss this topic with you and i hope that this topic can continue. i would really appreciate other forummers' inputs here...

take care and HUat HUat !!!!!!

[winston]

The hypothetical Oil bubble will burst hypothetically :p

Another way to bet on lower OIl prices if you dont want to short Oil

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Refiner Insiders Buy Most Stock Since 2000 on Oil Bet (Update2)
By Michael Tsang and Eric Martin

June 23 (Bloomberg) -- Refinery executives are buying more of their own stock than at any time since 2000, prompting investors to bet that a retreat in oil will boost profits and reverse the biggest share decline in a decade.

Executives at 10 refining companies snapped up $2 million of their shares last month, twice what they sold, according to data from the Washington Service, which analyzes insider patterns for 500 institutional clients. That helped raise the average level of purchases to the highest in eight years, data from Argus Research Co. compiled by Leuthold Group show. Before March, insiders dumped more shares than they bought every week since 2003.

Insiders added to stakes following a 40 percent slide in oil and gas processors in Standard & Poor's indexes, the largest drop since at least 1995, after a 43 percent gain in crude pushed down profits. Caxton Associates LLC, Citadel Investment Group LLC and Renaissance Technologies Corp., which oversee $64 billion in hedge-fund assets, also boosted bets that the shares will rebound, according to data compiled by Bloomberg.

``Anyone right now buying the refiners would have to be banking on a pullback in oil prices,'' said Jack Ablin, 48, who oversees $65 billion as chief investment officer at Harris Private Bank in Chicago, which owns shares of Valero Energy Corp. and Tesoro Corp., the largest and third-largest U.S. refiners by market value, according to data compiled by Bloomberg.

Profits at U.S. refiners plunged 98 percent in the first quarter after they were unable to compensate for oil's rise with higher gasoline, heating oil and jet fuel prices, data compiled by Bloomberg showed.

Piling In

Buying by chief executive officers, directors and other senior officials exceeded sales by the greatest amount since December 2000, based on data compiled by Leuthold from New York- based Argus's Vickers Stock Research unit. Vickers assigns a numerical score to each company for insider transactions based on how many shares the executive purchases and how his actions compare with colleagues, among other things.

Higher numbers are more bullish, while negative readings show insiders are dumping shares at a faster rate. The average rating of refiners tracked by Leuthold rose to 23.06 at the end of May. The score slid to a decade low minus 43.47 a year ago.

``Insiders know more about their companies than analysts or anyone else,'' said Andy Engel, 48, senior research analyst at Leuthold, a Minneapolis-based investment and research firm that oversees about $4.8 billion. ``They probably have a better idea of when business will rebound.''

Engelhardt, Grube

Leuthold, which turned bearish on U.S. stocks before a 19 percent tumble in the S&P 500 starting last October, began buying refiner shares this month on speculation oil will drop to about $110 a barrel, he said.

Irl Engelhardt, chairman of the Federal Reserve Bank of St. Louis, bought $509,000 worth of Valero shares last month, his first purchase since becoming a director of the largest U.S. refiner in 2006. In the same month, Tesoro director John Bookout III boosted his stake by 58 percent in the third-largest U.S. refiner. Valero and Tesoro, both based in San Antonio, have declined 39 percent and 57 percent this year.

William Grube, chief executive officer at Indianapolis-based Calumet Specialty Products Partners LP, bought 50,000 shares at between $11.73 and $16.85 a share in May, data compiled by Bloomberg show. The purchases, which began two days after Calumet slumped to an all-time low, were the first by Grube since the company went public in January 2006, according to the data.

Calumet, which processes oil into lubricants, solvents and waxes, has fallen 64 percent this year. Telephone messages for Engelhardt, Bookout and Grube weren't returned.

Reversal of Fortune

Oil and gas refiners in the S&P 1500 Composite Index plunged 6.1 percent last week after crude futures touched $139.89 for the first time on June 16. The so-called crack spread, or hypothetical profit margin for processing three barrels of crude oil into two barrels of gasoline and one of heating oil, has fallen 38 percent to $13.94 from $22.67 a year ago.

Eric Green, who helps oversee $5.5 billion as director of research at Penn Capital Management in Cherry Hill, New Jersey, isn't counting on gasoline prices to catch up with crude oil.

Demand for U.S. gasoline may decrease for the first time in 17 years as people drive less and buy more fuel-efficient cars, Cambridge Energy Research Associates, a Cambridge, Massachusetts- based consultant wrote in a report last week.

``These stocks can't go up with oil prices as strong as they are and demand for gasoline shrinking,'' said Green, whose firm sold its shares of Tesoro and Dallas-based Holly Corp., owner of refineries in New Mexico and Utah, in the past six weeks. ``You really want to own refiners when oil's going down, and not straight up.''

Caxton, Renaissance

That hasn't kept some of the world's biggest hedge funds from betting on a turnaround.

Bruce Kovner's Caxton, the $12 billion hedge fund firm based in New York, purchased or increased its shareholdings in six refiners, including Valero, Tesoro and Philadelphia-based Sunoco Inc., in the first quarter, according to Securities and Exchange Commission filings compiled by Bloomberg. Citadel, the $22 billion Chicago-based hedge-fund firm run by Kenneth Griffin, scooped up 192,610 Tesoro shares and boosted its stake in Holly almost eightfold to 190,681 shares last quarter, the data showed.

Renaissance, a $30 billion hedge fund firm run by James Simons and based in East Setauket, New York, bought 609,888 shares of Valero and increased his stake in Calumet by 5.3 percent to 32,000 shares. Representatives of Caxton, Citadel and Renaissance declined to comment.

Billionaire investor Kenneth Fisher says refiners are attractive even if oil prices don't decline because the U.S. hasn't built a refinery in 32 years.

``We're not going to be putting in more refineries,'' said Fisher, who oversees more than $47 billion as chairman of Fisher Investments Inc. in Woodside, California, and who owns Valero and Tesoro shares. ``Whenever there's any place where there isn't more supply, owning is not a bad thing.''

[kennynah]

a couple US Oil Refiner counters include VLO, FTO

[HengHeng]

Wah kenny power lah .. thanks for the detailed elaborations

i don't think i will be able to explain it in the way you are able to. I will never be able to give a lecture or what on it. So don't tell me what strandle strangle butterfly all this .. to me .. it is worse than greeks .. lol ..i still have alot of learn .....thanks again i've learn alot from his explaination as well. I'm still a newbie and would need years and years of learning before achieving his standard. Probably i won't in my lifetime. LOL would apologize to those pros in options ... never am a pro in that.

Coz usually i will concentrate on imagining how to use options to work on risk management rather than using options to earn money. Of course there are ways to make money using options but i'm always keeping my options open for other opportunities elsewhere. IF one need to know more about options they can alway go to kenny for more info coz i wll never be able to explain it like how kenny does it.


to me i just use a simple analogy.

Expected Value = Payoff * Cost of opportunity

so long as it is above one , we can consider.

[HengHeng]

oil just tanked .. hmm if never go below 130 can consider longing.

[kennynah]

inventory rose unexpectedly
gotta wait for 215am speech from fomc to get confirmation. Until then I don't expect very wide swings