Crude Oil Bull Call Spread Strategy

By: Tarik HusseiniMay 9th, 2011 10:47AM CDT


After last weeks commodity route the question on many traders' minds is whether or not it is time to jump back in. Bloomberg notes that "the last time the S&P GSCI fell this much, the index rebounded 12 percent the following week, and by the end of last month, it had more than doubled." Goldman Sachs, whether you consider them lucky or prescient in calling for clients to underweight commodities a couple of weeks ago, is now stating that the pullback "does create more upside opportunity, particularly in the second half of the year."

Based on the violence of the selloff last week and the damage that was done both technically and to trader psyche, I would say it is premature to jump into many of these commodities in the hope of catching the bottom. Particularly in silver and crude, I would wait for the markets to settle down and consolidate before jumping back in. Premiums will deflate a bit and make it more reasonable to use options to gain exposure to the markets once volatility comes out of the markets. At that point buying bull call spreads in crude makes sense to take advantage of many forecasts that call for new highs in oil by the 3rd Quarter. If one could buy the July 108-113 call spread for $600 with a potential profit of $5000 dollars, it would be a good risk to reward ratio with 39 days for the trade to work. Currently that spread is trading $900.


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Tarik Husseini
Tarik Husseini
Senior Commodities Broker
After earning a degree in Political Science and Philosophy at Loyola University Tarik put his education to work by taking a job as a runner on the floor of the Chicago Board of Trade. He parlayed that whim into 15 years in the business. His initial exposure to futures began in the Grain room, where he ran orders from the order desk to the brokers in the pit. Surviving the dog eat dog world of the pits he then went to the phones as a clerk, interacting with clients on a daily basis. Within the ye.... Read More

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ESM2 Jun '12 Emini S&P 600 132850 11:35:31 PM                  GCLM2 Jun '12 GBXCrdOil 43 9324 11:35:40 PM                  ZCN2 Jul '12 GBX Corn 6 6206 11:35:33 PM                  ZBM2 Jun '12 GBX BOND -100 146160 11:33:00 PM                  IDXM2 Jun '12 ICE $Index -79 81445 11:44:25 PM                 


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