Alright I will grant you that the title isn’t quite as appealing as “Great Investment Ideas for 2017” – but deep down it does have a certain appeal. Unfortunately, the truth is that I am not very good at “predicting” things. So I don’t really know what the great investment ideas are for 2017 (although I hope to latch onto them early enough to take advantage of them anyway, whatever they may turn out to be).
In essence I don’t deal in “expectations” so much as I do in “possibilities”. So in this and other upcoming pieces I will look at several admittedly very speculative possibilities.
Caveat: As always I need to point out that I do not “offer advice” here nor do I “recommend” trades. I just report what I see. Sometimes the ideas are good, sometimes not so much (the analogy would be when George Carlin used to say that his job was to think up the “goofy s%$@” and report it to his audience). You have been warned.
(See also January Showdown – Murphy vs. Munis)
Crude Oil in the Near-Term
Seasonally speaking, crude oil is in something of a “danger zone”. Figure 1 displays the annual seasonal chart for crude oil. You will note that the period between January Trading Day #1 and February Trading Day #11 is not terribly robust in terms of upside performance.
Figure 1 – Crude Oil Annual Seasonal Trend
Figure 2 displays the growth of capital generated by holding a long position in crude oil futures only during this period since 1983.
Figure 2 – Equity curve from holding Long crude oil futures 2nd trading day of January through 11th trading day of February
While the long-term results are pretty bad, it should be noted that this seasonally unfavorable period witnessed a decline in 19 of the past 32 years (which is just under 60% of the time). So it is by no means a “sure thing” that crude is headed lower in the near-term. But it does suggest caution I in order and that there is at least a chance o lower prices for crude.
Figure 3 displays the weekly chart for Spot crude oil. We see some meaningful resistance levels as well as a potential key reversal back to the downside on – cue the scary music – the 1st trading day of 2017.
Figure 3 – Weekly Crude Oil faces resistance (Profitsource)
So can we conclude that crude oil is headed lower and that we should sell short as many crude oil futures contracts as we can get our hands on? Well, that was not exactly where I was going with this. Since this is just a “wildly speculative” idea I was thinking of something with a whole lot less dollar risk involved.
The position highlighted in the Figures below involves buying in-the-money put options on ticker USO – the exchange-traded fund that (purports) to track the price of crude oil. The position involved is simply:
*Buy 1 USO Feb2017 13 put @ 1.50
-Buying a 1-lot involves a cost – and maximum risk – of $150.
-As this is written, USO shares trade at $11.57 a share. The breakeven price for this option trade is $11.48 a share for USO. So time premium and time decay is not really much of an issue. Either USO will decline and this position will make money or USO will not decline and this trade will lose money – but no more than $150 per option contract.
-The Feb options expire on 2/17 which is one day after February Trading Day #11 – our scheduled exit date.
Figure 4 displays the particulars and Figure 5 displays the risk curves.
Figure 4
Figure 5
Summary
Is this hypothetical position a good idea? For the record, I am not actually suggesting that it is. What I am saying is that when you combine a negative seasonal trend with a potential downside reversal on the weekly chart you have the potential for a decline. By buying an inexpensive put option – and by paying very little time premium – even a small decline in the price of crude could generate a decent return.
Hey, it’s not the worst way to blow $150 bucks.
Jay Kaeppel
