Who's an expert on the "right" position

nitro

nitro

I started this thread and it got moved unreasonably to the chit-chat forum, so I will start it again, re-posting the answers that were given serios consideration.

Sorry for the duplication - all the posts that follow are my copying them from the other thread and moving them here :(

Okay,

First, some background - My wife is psychic.

Next, she thinks that crude and possibly heating oil is going thru the roof. In the case of crude, she thinks that it is going to $42 - $45.

The question is, given that you "know" that, what is the "best" position to take and still protect yourself, and why. Here are some examples:

1) Buy XOM or one of it's cheaper competitors
2) Buy QM (which month ?)
3) Buy a call option on XOM (which expiration ?) or one of it's cheaper competitors, e.g, RD (P/E, P/B, etc)
4) Buy XOM, sell the appropriate number of QM to hedge but still keep more upside than downside
5) Buy a call option on QM
6) Buy a calendar spread on QM
etc.

So, what would you do assuming QM goes to $42, and you want to have the best bang for your downside buck?

nitro :mad:
 
Quote from swoop[TR]:

Just buy Crude Oil Futures Contracts and to protect yourself, you could take put options on these contracts at a level that you feel comfortable with (at expiration before or at futures expiration).
If you really want to play the crude oil story with stocks, XOM could be ok. I'm just wondering if you shouldn't be playing it with options altogether (would provide more leverage ). Again, it depends on your risk aversion.
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Quote from nitro:


There is more to a position than it's leverage - there is also it's flexibility.

For example, I am considering putting on a synthetic call on QM. This way it will be easier for me to lock in profits for her (by turning the position into a straddle,) while at the same time allowing room for the position to continue to be profitable (albeit at a slower rate.) I prefer this type of position management to the "trailing stop."

BTW, what does the [TR] stand for?

nitro
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Quote from swoop[TR]:

Nitro, good call on flexibility. I hadn't noticed you were the poster. Well, it seems you could play the oil futures story many different ways, and obviously you would want to have the best risk/reward scenario. The synthetic call seems to be the best scenario IMO. Although, what asset would you choose to go long? XOM or Crude Oil Futures?

TR...ahha! That's my edge on the market ;)
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Quote from nitro:


That is part of the problem, as XOM and CVX have low betas. Assuming I would go long the right ratio of XOM (or more likely on of the cheaper competitors, e.g. CVX), I would short the "right" amount of QM.

I am also looking into an oil ETF (I am researching to see if there is one) and using it as a proxy for the stock, and selling QM.

nitro
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might want to look at leaps...but avoid XOm as it moves like molasses.

also may want to do some far out of the money, far dated commodity options (heating oil/oil)

as well, look at the crack spread as there may be some opportunities there as well.
 
Hi Babak, I was looking over some literature about crack spreads and was wondering if you trade them.

What broker do you use , one who is knowlegable enough to enter crack orders. If iraq gets invaded I think the crack spread will go back down. How is that for a leading indicator of big oil !No wonder oil stox been getting whacked past couple of months.
 
If you are looking for a stock to profit from a spike in crude, then go for an E&P company like APA or APC, not an integrated major which might be hurt by refining margins. Of course the biggest bang will come in the futures but they have run a long way already.
 
Thanks AAA.

Check out this scenario though. When war happens you could see a huge spike in crude initially-first week maybe. But heating oil season is tailing off unless we have frigid temps still by April, motoring season might not be too robust because of bad economy and tourist a little leery going to disneyworld due to red alerts,etc Perfect setup for a collapse in the crack right?
 
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