Thursday, May 04, 2006

Big Oil

If you want a perfect gamma trade, we have one right in front of us. I am convinced that the spot is going to move violently from these levels and while I can't call a direction (yet) there is definitely an outsized move brewing. So, a synthetic strangle on the futures is the game in town.

But I think there is even a better way. While I am an options guy, I am hell-bent on playing direction. In fact as I mature and accumulate battle-hardened emotional scar tissue I become more and more direction oriented. Because even though it's a tough, damnably tough game, that's where the real money is. Damn the hedge.

Watch the spot to rally from here and stall around 73.5 level (June contract). That's the inflection point (yes, it's a 5/8 Fib node). A slide from there is a short signal. An aggressive rally above is where you get long. Also, for super-aggressive types, it would be at least probabilistically correct to get short right here (71.44) with a quarter size. The reason I won't do that is that my gut tells me that this is situation is actually going to end up a long trade.

Or, sell the future and buy the options. Much less risk and a highly probable return. That's money too.

Cheers,
/Dmitry

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