The current situation in Egypt is a prime example as to why selling call options in crude oil can cause ulcers. Puts 'seem' to be much safer overall. If you're thinking about selling calls now with the logic that the unrest can't get much worse in that area...be careful. I'm thinking out loud here. Today turned a little more violent and crude was up about $2 per. The continued violence can increase prices further. Once calm takes over, if and when who knows, prices should level and fall back. But, this is where you still want to take caution with selling calls. There are more than likely a lot of Morsi supporters that can rise up and 'do something' to the Suez canal region, either threats or action that can spike prices again.
Why not sell verticals instead? That is what I do as selling naked calls or puts is not for me. This way I limit my risk and am able to sleep at night. Essentially I see it as an hedge against a black swan event; an event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict.
To collect enough premium the strikes are closer to the money but are still more then one std away. Hence they are generally still +EV trades. In addition, I like to sell on vol pops to collect a little more premium. In case of a trade going south I often roll the position before a max loss has been reached.
I'm sitting on some 130 CL calls sold on July 2nd. Yep, not the best timing.
My thoughts on the technical situation:
We had a clean break from a multi-month resistance zone at 100 (we've coiled the spring and could be in for a sustained break out)
The current move has been spiking up aggressively in $2-3 increments (not likely to last since this is how sustained moves end not begin)
The next substantial level of resistance is 110.
My thoughts on the news:
The NFP news that things aren't as bad as we thought is unlikely to maintain any momentum in the markets. We are in the doldrums. Things aren't bad but we all know the only thing keeping the stock market up is printing $. The Fed has put themselves in a tough position with this one because the previous sentence starts as a fringe idea and then becomes what nearly everyone believes. Hence the fear of being weened off the free money.
The situation in Egypt is less simple to gauge. This could either be a small incident that blows over in a few weeks or escalates the whole country - again.
My thoughts on the fundamentals:
Haven't changed much in the last few weeks. I think that bears some reflecting. As Ron pointed out in an earlier post June supply tends to be a little tighter - however, that is a pretty temporary blip.
Demand is still sluggish based on the woes of the world economy.
So the question is do I take a small loss now on my 130 calls or be prepared to ride it out to 110 or so? I have the buffer to ride it out to 110.
The comfortable thing to do is actually to take the loss. This frees up my mental capital to evaluate other trade ideas and frees me from the uncertainty of sitting in a position underwater. This also frees up my available margin to take more profitable trades that will have their margin requirements decay much faster.
The uncomfortable thing to do is usually the most prudent - which would be to hold the position to 110. This means that I am playing the statistically likely scenario (that this move goes nowhere) and in the long run likely results in higher profits. The challenge of course is that in the unlikely scenario of a fat tail I must punch out at a much larger loss and I must be ok with that. Failure to recognize the fat tail (and more importantly to act on it) is what ensures broken accounts.
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