August 30, 2005
Sell November 2005 Crude Oil
I don't think sentiment can get any more bullish in the energy complex than is currently the case. All of the damage from Katrina should now be in the market and unless there is another Category 5 hurricane bearing down on the Gulf of Mexico, I can't imagine what is immediately coming out that could spur another run on the upside....Yes, as regarding the off shore platforms and refineries, there will be damage assessments coming out over the next few days or weeks (suggesting shortages), but I strongly believe that virtually all energy market users have already done their buying in fear of higher prices, and the only place for the energy market to go now is DOWN. I have no idea by how much, only that experience has taught me downswings from historical highs in any market can initially be enormous. With this in mind, seeing a $15.00 ($15,000 per futures contract) drop in Crude from here would not surprise me at all.
I am recommending shorting the November Crude Oil contract shown below. As option prices have gone through the roof, buying put options is not really suitable and this trade should therefore be done by selling the futures contract, which entails margin and more risk....So this trade is not for everybody. Here are the numbers:
Margin per Crude Oil contract is currently $4725
I would recommend a $4.00 per contract stop loss or $4000 per contract. As this is a futures contract, I have to note a $4.00 stop does not mean your risk is necessarily limited to $4000. It can be more than that...On the flip side, if you do catch a $10.00 drop, that is a $10,000 per contract gain.
I would suggest using approximately $8000 per contract to do this trade.
This idea probably scares the hell out of you....as it does to me....And you may also think this is absolutely crazy....However, both of these sentiments may also mean this is not a bad idea at all. Oftentimes, the best trades are those in which you think, "This probably is worth a shot", but you just can't get yourself to put the money on the table, or think, " I'll watch it for a few days to see if it goes any higher".
If this is a good idea, I think it needs to be done now, dead into the strength of the past few days....Give me a call if you want to look at it.