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"The fundamentals have been predicting this for months."
Should people (like me) just have been avoiding selling crude puts for a while now? And if so, when should someone have stopped selling, based on these charts? Selling crude puts has been pretty favorable all year long, up until this week...
I am having trouble drawing what I think are meaningful conclusions from the charts you posted, Ron. Here's what I see, can you help me by telling me what you see from a timing point of view? By that I mean I see the general idea (higher supply, lower demand) but I have trouble turning this into "hey, don't sell crude puts starting in October for a while."
Chart 1: OK, it is easy to see that supply broke to a new high in say July 2012 and just kept going up from there. So, does that mean starting in JUly 2012 is way a bad idea to sell puts? Selling crude puts worked pretty well for a while, at least until this week. I guess I am having trouble seeing how this chart could be used for anything concrete timing wise...
Chart 2: Looks like we are near a multi year low in demand. But 2 years ago, we were in a similar situation (supply reaching new highs, demand reaching multi year lows). Yet, it still would have been OK to sell puts. Even earlier this year, we were low on demand, high on supply, but still price did not react.
Chart 3: I see times when a drop in spec interest precedes a drop in price, but I see other times where a drop in spec interest has no impact on price. What in your opinion makes this recent drop differently?
Sorry to anyone if these are dumb questions. But my issue with any fundamental data is that it may predict general future, but it is hard to use as a timing mechanism. And maybe, I have just been looking at this all wrong.
You are correct that you will not get exact timing from fundamentals. But it should direct you which way the market may move when it does move.
The thing I didn't show there is world conflicts which would trump these fundamentals. Libya stopped exporting for a while.
And now they are ramping up production.
Plus other things that went on in other oil producing countries like Iran. Then you had Japan importing more oil because they shut down nuclear power after the earthquakes. You also had no hurricanes this year affecting the Gulf.
I look at fundamentals to give me the tendency for which way it probably will move from current prices. I then either don't sell on that side or I move further OTM on that side.
Like right now I would not sell KC or Cocoa calls. I would sell puts.
I wouldn't have sold grain puts this summer. But calls would have been OK.
I wouldn't have sold calls in LH and LC this year because of fundamentals. 13% of US hogs died from the PED virus. Cattle inventories were very low.
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Slightly further off topic than you already are, but since you guys are talking about Crude have you seen whats happened to the back of the curve in the last year...
Until recently the curve moved up and down almost in parallel, then in the last 3 months Dec has collapsed versus the back as illustrated by the Z14-Z19 spread
- a significant change in the shape of the curve. It went from being close to a typical smile to being sharply skewed "to the left" (more demand, higher price for the puts)
- Risk Reversals went from positive to negative. Risk Reversals can be a trading strategy, but they're also a good way to plot the IV curve/skew as a time series (it saves having to click through x number of days to watch the shape change).
You can calculate them using any delta, but a couple of common calcs are RR10 (IV of a 10-delta call minus the IV of 10-delta put) and RR25.
Looks like some really knowledgeable option traders on this thread. I'm just starting out. Only looking to supplement my trading using simple option spreads but can find a good book on the basics. The books I have only discuss profit at expiry, but never give scenarios that explain what happens when option trades are closed prior to expiry. I especially would like to know what happens when an options spread is closed before expiry, or even if that is allowed.