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.
ECB officials said last night that ECB President Mario Draghi will likely wait to hear Germany’s Constitutional Court’s ruling on the EFSM before publicly unveiling his plans. Many were hoping Draghi would unveil his plan after the ECB’s September 6th meeting, but this is becoming increasingly unlikely. Today Reuters is reporting that Germany is the latest European nation to begin studying the possible impact of a Greek exit from the Euro. This comes ahead of Chancellor Merkel’s meeting with Greece’s Prime Minister today. Merkel has repeatedly said that she would like Greece to remain in the common currency, though clearly someone in Germany believes a Greek exit is possible outcome worth preparing for. This morning US new durable goods orders numbers we released for July, coming in at a gain of 4.2% M/M. Though this was strong than expected, it was primarily driven by strong aircraft sales. Non-defense orders excluding aircraft were down a sharp 3.4% M/M versus a 0.2% decline expecte...
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