Trading the Crude Oil Bottom

In Blog by Michael Arnold

Yesterday, the Wall Street Journal quoting Suhail Al Mazroui, the United Arab Emirates energy minister, as saying OPEC was willing to cooperate with other producers on cutting production. Analysts immediately put the quote in perspective saying actual action is needed, as these types of rumors have circulated before and OPEC has lost credibility as far as driving prices with just words. Most people in the know think any rally will be short-lived if all we see is quotes, but still prices surged more than 5 percent before easing slightly in the afternoon. This morning, the trades seem to be from the long side.

Binary trading is a good option for trading a potential crude oil bottom, but even more so, Nadex spreads are ideal. Nadex is a CFTC regulated exchange, but they also have a spread product which acts like a traditional vertical debit call spread, but yet are easier to use. Because the trade is so crowded, meaning there are so many people and institutions short crude oil futures and for such a long time now, the snap backs to the upside can be violent. They can also be short lived. The margins on NYMEX crude traded at the CME group (also regulated by the CFTC) have gone through the roof. The advantage of the short-term, limited risk, one-day Nadex spread really shines through in this environment (go here to learn more about Nadex spreads http://www.nadex.com/trading-academy/webinars.html). Look for a Nadex spread that frames the CL contract at its current level, meaning the indicative index is right in the middle of the floor and ceiling strikes. At that precise point (we call it the “null point”) you will pay the lowest net premium for the spread. In these types of markets, be prepared to exit the spread rather than let it expire. Spreads are NOT yes/no trades like binary options are, so you must have your hands on the wheel. The global oversupply of crude will continue if economies weaken, due to weakening demand, so these short-term vehicles are perfect for trading a potential crude oil bottom.

Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results