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Morning Update

With hurricane Sandy bearing down on the east coast traders are trying to figure out how energy markets will be affected. One trader was positioning himself to take advantage of volatility in crude oil on Friday by buying the USO Nov. 32 straddle for 1.85. A straddle involves buying both a put and a call in the same expiration and strike. Traders buy straddles when they expect an explosive price move but are unsure of the direction. Straddles are also very sensitive to changes in implied volatility and profit when volatility increases. This spread will profit if USO is above 33.85 or below 30.15 at expiration. As of now the NYMEX will be closed to today and could be closed again tomorrow. Ahead of the storm in electronic trading crude oil is lower while gasoline and heating oil are higher. This is a result of east coast refiners in Sandy’s path shutting down, which means less demand for crude oil and less supply of gasoline and heating oil. Crude oil has fallen considerably from its highs in September, mainly on fears of a global slowdown and excess supply. USO looks like it could be headed to the 30.00 level, which is near its 2011 and 2012 lows and is likely to provide support. The bullish case for oil is that it is oversold and buying it at these levels over the past few years has been a winning strategy. For traders wanting a fixed risk way to profit from the potential for large directional swings in crude oil over the next few weeks, this is the trade for you.

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