How to Make Crude Oil Smaller

Time Stamp: October 21, 2021 5:28 PM
Source Node: 1286027

After presenting a trader friend with the potential edge in selling crude oil’s recent quinquennial highs, he responded, “Cool, but how high can it go?”

This question can plague many attempting to act on what the data tells them, and it’s especially justified for volatile commodity markets like oil and natural gas. Thankfully, crude oil has been around for a while, and there’s enough data to both display an opportunity and measure the risk around it.

Crude Oil: Trading the Reversal

Knowing that a market has historically reversed course from its highs can be great news for contrarians looking to sell expensive crude oil, and an average move lower of -$2.50 in the month following said high can pose a big fat edge.

Crude Oil’s Average Move After New High since 2015
Next Day Next Week Next Month
-$0.08 +$0.05 -$2.50

Source: Yahoo! Finance (https://finance.yahoo.com/) as of 10/13/21

Extending Duration in Crude Oil

The challenge becomes withstanding the P/L volatility that can come along with a short crude oil position, not to mention the market’s ability to reach $100 a few times in the last decade.

CL Crude Oil

Source: Yahoo! Finance (https://finance.yahoo.com/) and dxFeed Index Services (https://indexit.dxfeed.com)

Gain exposure to popular markets with standardized tick values and expiration dates on the Small Exchange. See why the smalls are making a big splash. >>”></a></span></span></p> <p>The first step to extending duration is often to simply reduce size. Small Crude Oil (SMO) futures cut the size of traditional crude futures (CL) contracts tenfold. Next, offsetting part of the short position with a long deltas via a short put can help even further. Options on the highly correlated, similarly sized Energy Sector ETF (XLE) offer a solid spot to do so.</p> <table width=

P/L Standard Deviation by Position

-1 CL Future -1 SMO Futures -1 SMO Future
-1 30Δ XLE Put +/-$6,400 +/-$640 +/-$480

Source: Data from Yahoo! Finance (https://finance.yahoo.com/) and dxFeed Index Services (https://indexit.dxfeed.com); theoretical values as of 10/13/21

Crude oil has a volatile reputation, and rightfully so! The commodity has both broken the $0 bound and bounced back above $80 since the start of 2020. But the modern trader has the tools to remain chill during periods of explosiveness in this market and potentially take advantage of the opportunity in front of them.

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© 2021 Small Exchange, Inc. All rights reserved. Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information in this advertisement is current as of the date noted, is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading futures involves the risk of loss, including the possibility of loss greater than your initial investment.

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Source: https://www.danielstrading.com/2021/10/21/how-to-make-crude-oil-smaller

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