Energy Humpday

Every Wednesday at 1 PM Eastern the U.S. Petroleum Inventory Report is issued. That’s 10 AM Pacific. Some data is released at 10:30 AM Eastern. When holiday schedules happen, the actual day of data release can shift. It’s one of those “mostly this day, except when it isn’t” government things… The web site is here:

http://www.eia.gov/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/wpsr.html

Usually oil drifts down a little going into the report as folks are exiting positions prior to whatever happens. Sometimes, if a lot of folks are short oil, prices will rise prior to the report. Typically, whichever way it has drifted, at the report it moves the other way. Not always, but often. Why? Folks establish new positions. More of them were “right before they exited”, so resume their prior position.

The use of protective options also has this effect. If I’m “Long” a lot of oil, I can buy a “put” to protect my position prior to the Oil Inventory Report. Folks buying a lot of “puts” cause the brokers to do a “conversion”. A conversion means that they sell the underlaying contract and provide the put. They also buy a call to cover their short position. Now they are “short” oil, so if it gets “put” to them, they don’t care. Yet they have a call, so if oil goes up, they can “call in” that oil to cover their short. The net effect is that they (the broker selling the put) have no risk from the movement of oil, but net sold oil short. This can push the price down. So just a lot of folks buying “puts” to protect profits in a position can cause the market price to drop due to selling pressure from the brokers doing a ‘conversion’ to cover their risk in selling the puts.

http://www.theoptionsguide.com/conversion.aspx

That link talks about stock options, and using the inverse trade (buying the underlaying, selling a call and buying a put); but the concept is the same. This is why a brokerage house, like Goldman Sachs, can sell 20,000 puts to someone and not worry about taking on the risk. For the average Joe, the commissions on all this would be a pain. For the broker, they don’t have to pay themselves a commission… so it’s easy for them to do.

At any rate, there are forces that cause the emotional “worry” of folks going into the announcement to be reflected in price, and when the worry leaves, prices move back (in whatever direction from which they came.) UNLESS, the announcement confirms the “worry”.

So it’s often a dicey moment in Oil and things like gasoline and heating oil futures markets. Often a price will spike one way, then wobble right back the other, as folks think through what an announcement really means.

A generally OK strategy is to take a position into the inventory report, then sell out of it on Friday. Why carry it over the weekend if it is likely to start reversing on Monday / Tuesday as the next report approaches? Again, not an ‘always thing’, but a useful rule of thumb. Professional traders don’t like to carry positions over the weekend anyway, so if they all went long on Wednesday, they would like to sell out on Friday; for example. For longer term trend trades, these wobbles can let you time slightly better entrance and exist points. So, if folks all jumped on the long side on Wednesday, you can expect price to start weakening on Friday, often reaching a low point Tuesday Evening / Wednesday Morning. So you buy cheap in a rising trend. Say the trend runs a couple of weeks, then the best “sell” point would be near Thursday (before the day traders exit Friday).

Again, it isn’t always that way, but on average it adds a bit of gain. When oil is falling, those points reverse. Shorts cover leading into the report, so oil rises a bit into Wednesday, then usually falls on high inventories as the shorts reestablish positions (or sell to close their protective calls). Friday some will ‘cover their shorts’ and price will stop falling and sometimes rise a bit. Just upside down from the prior trade.

That means the first thing you do is figure what the trend is; then you time the entry for that trend trade based on the patterns described above. Every so often the inventory report will be a big surprise and cause a reversal of expectations. Sometimes the Strategic Petroleum Reserve will buy, or sell, a load of oil and surprise folks. Every so often a hurricane will disrupt things, or a war will break out, or someone in the Middle East will kill some other folks; and oil will spike or plunge on a ‘surprise’. If you trade oil contracts, expect surprises. It’s part of the turf. This last week the exchanges raised margin requirements unexpectedly and oil took a big hit. It happens.

I have a posting with the “standard charts” for oil and energy ETFs at this link:

http://chiefio.wordpress.com/2012/01/01/oil-and-energy-stocks-and-etfs/

It has a longer description of the various ticker symbols and more variety of things in the charts. The charts here will vary based on what I find interesting in any one week.

These charts come from BigCharts.com and you are encouraged to go there directly and learn to set the indicators yourself. That way you are not dependent on me to make charts.

One Year version of the chart below at BigCharts.com.

Here is a live 6 month version of that chart which will change as the oil inventory report comes out.

Oil and related products vs SPY Benchmark

Oil and related products vs SPY Benchmark

OK, if you hit the link to the standard chart set, the oil company stocks look like they have started to move. Time to dig in to oil companies in a bit more depth and probably a decent time to pick up some international oils. I’ll do a deeper look at them a bit later in the week (or folks can chime in here).

On this chart, the energy commodities (other than KOL coal) look to have started nice runs. Even natural gas UNG is off the bottom. So energy commodities (other than coal) in play too. It could end fast (if it is based on Iranian fears) or it could ‘have legs’… We’ll see. But oil and energy move fast, so don’t expect this to be “buy and hold” action.

In Conclusion

I need to look at the oils and oil service companies in more depth. Time to be in energy (and perhaps all commodities?) and probably a bit late on the entry as I was doing “other things” with V1 vs V3 and security… That being one of the problems of trying to be a part time trader. It gets boring and you get distracted, then “miss the exact moment”. But this is likely “good enough”.

It is helpful to at least check the “one stop” chart on a regular basis to catch such things early.

http://chiefio.wordpress.com/2012/06/04/a-very-useful-one-stop-investment-chart/

Subscribe to feed

About these ads

About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
This entry was posted in Economics, Trading, and Money and tagged , , . Bookmark the permalink.

8 Responses to Energy Humpday

  1. BobN says:

    Thanks for the post, a subject near and dear to my heart as I trade stock and options daily and have since 2004. There are so many ways of trading that if you know what your doing its easy to stay ahead of whats going on. I was lucky enough to get a couple nice chunks of stock working start-ups in the valley. After riding a couple market cycles seeing the wealth go down and recover to only go down again, I decided I need to figure out how to protect my holdings and make money which ever way the stock moved. I read about every trading book out there and got a pretty good understanding of all the possibilities. I started out trying to trade them all and found I was wining on some and losing on others. I believe people should learn what trades work for them and narrow in on using that strategy. Also, don’t shop all over the map for stocks, pick a decent number that fit some profile and study them until you can anticipate their price movement very reliably.

    I started out trading stock and used options as a hedge against big price moves, but I soon discovered I was making more off my options than my stock trading. I now trade more options and use the stock for leverage on the number of contracts I play at a time.

    In option trading I sell more options than I buy. The time decay on options is the big gorilla in the room and I have found that it is my friend. I started out trading in the money vertical spreads and was hitting 95% success in wins. I went a bit crazy and sold naked and was minting money, but I got caught in the 2008 market plunge and turned into one wild trader to survive. Luckily I made it through that time and have become much more cautious in how I sell contracts.

    Originally I would study the Greeks in picking my options, but I was putting in so much time I didn’t have a life. I have sense just look at the options and see what the time value is for a trade and use that as a good enough indicator.

    Every stock has a trading strategy, you just need to find it. There are stocks that take big dips every 3rd quarter, just play them on the short side before the quarterly announcement. There are all kinds of patterns that can be detected and traded with good success.

    I make decisions by watching Volume, 30 day moving average and MACD. With these entry and exit points can be nicely selected. Watch the VIX (volatility Index) as it is a good indicator of what will happen, do the opposite of what the VIX is pointing to.

    As an aside, I have had poor luck trading oil. I have made a lot only to turn around and lose it. I trade oil very sparingly as uncontrolled events whip-saw the prices. If you guess right you win big, but if you play it hedged the risk doesn’t seem worth it, at least to me.

    Stock and options trading requires work, if you don’t do the homework your just gambling. If you are going to be a serious trader and survive much preparation and study is required.

  2. Pascvaks says:

    Curious, again, I went and made a 5 year/weekly chart of the above one year chart to see “What had happened over the long haul since the Great Dip?” Here it is in the FWIW category of ‘Since Energy Hump Day Weekly Analysis” –

    http://bigcharts.marketwatch.com/advchart/frames/frames.asp?show=&insttype=Stock&symb=uso&time=12&startdate=1%2F4%2F1999&enddate=8%2F21%2F2011&freq=2&compidx=aaaaa%3A0&comptemptext=uga+spy+ung+uhn+kol+&comp=uga+spy+ung+uhn+kol+&ma=4&maval=24&uf=0&lf=2&lf2=4&lf3=1024&type=4&style=320&size=3&timeFrameToggle=false&compareToToggle=false&indicatorsToggle=false&chartStyleToggle=false&state=15&x=44&y=8

    As I pretty much always do, I tend to hold such graphs up to a Political Strobe Light to see what I can see (aka- ‘Devine';-) It sure looks like the Economy was in a ‘Wait’n’See’ mode for the entire Obama Term. I can’t even see where our $Trillion Stimulus did anything for anyone except some FatCats who didn‘t need it anyway (and certainly didn‘t deserve it;-(. Can anyone see it? I know, “it held the bottom from going through the floor”, right?

    PS: “People sure ain’t as bright as we think they are.” Looks like it’s time to sweep the last 4 years under the carpet and open a 6 Pack, watch some pathetic TV, and open another 6 pack. Same old Game, ‘Hurry Up and Wait’ for the next miracle or disaster from inside the Beltway. One of these days I’m gonna’ take my Government Retirement and Social Security Checks and Medicare Card and … and… and.. ahhhh.. excuse me a minute, I think I need another 6 pack… (SarcOff)

    PPS: Looks like four years ago this very month McCain was branded a No-Go on Wall Street (as What’sHisName was getting the GreenLight) and the “Great Dip” began; once the fear of being tossed out the Left Wing Window died down, everyone setteled down for a four year nap. Hindsight is 20-20, if you don’t look too close;-)

  3. BobN says:

    @Pascvaks – While your drinking that 2nd six, you could toy with the idea of selling options against the f;lat line. When it gets to the top of the range sell calls and when it gets to the bottom sell puts. If nothing else that would buy beer money. If something looks eminent on the Horizon, just pass on selling the option or get out. Oil is more likely to spike up than drop very fast, so do credit spreads on the high side and go naked on the low..
    Every year the summer months get slow with low volatility. A lot of people go by the saying, “Sell in May and go away”. This is the best time to sell options as the time decay will greatly help. Be ready by the end of August for stocks to pick up movement, typically down in this kind of market.

  4. E.M.Smith says:

    @BobN:

    That’s about right…

    I generally actively trade a very few things at any one time, but I keep a wide net cast for “information” in other trades. So, for example, I keep an eye on oil and energy (as it impacts so many other things) but only actually buy a position it it when it is more promising than most anything else. As you noted, one news event and it moves overnight…

    @Pascvaks:

    Pretty much. No reason for business to grow. No reason to expect money making to grow. Just waiting to collapse or end the misery… Part of why I’ve been in cash so much of the time. ( I’d sell options but the particular account where most of my money is located is not approved for that… and my cash account doesn’t have enough equity to cover a naked option sell…)

  5. p.g.sharrow says:

    @EMSmith; Naked options may be legal but to sell something that does not exist is unethical and damages the actual owners, a fact that you are more aware of then most. pg

  6. BobN says:

    @EM – following different sectors is great to spread the risk. I follow various sectors and track about 10 stocks in each. Usually the sectors move as a group in general. By keeping your money spread you reduce the risk of a big sector move. Whats your opinion of the options that are 2x or 3x multipliers. I have been very hesitant to try them, just being cautious.

    @P.G.sharrow – I disagree with your take on naked shorts being unethical. When you sell an option its a contract to perform on that contract. The contract is backed by your account value so everything involved is real. If you sell a option contract that is exercised, your broker will automatically adjust your account. Its a real contract obligation and real money is involved.
    Options can be used to get you a better buy price. If you sell a put just under the market price and the stock dips you pick up that stock at the lower price and you keep the option premium sold. When ever I am thinking of buying a stock for the long term I usually acquire it through selling puts. If you sell puts a few time before being assigned you end up having a nice low buy price. I do that and have tracked my returns. I typically make about 25% more by doing it this way then just jumping in and buying.

  7. R. de Haan says:

    According to Zero Hedge, consumers are paying USD 35 per barrel too much due to market manipulation.

    http://www.zerohedge.com/contributed/2012-07-19/forget-libor-gate-oil-market-manipulation-far-worse

  8. E.M.Smith says:

    @P.G. Sharrow:

    I have mixed feelings about it. On the one hand, the ability to sell short without a ‘borrow’ of a stock or without an uptick just means that some Evil Bastard Fat Wallet can, effectively, sell YOUR stock out from under you, drive the price down via nothing more than his Fat Wallet power, and then “provide a liquidity service” to the market via buying our your shares at pennies on the dollar when you finally can’t stand it any more. Not exactly helpful, IMHO.

    On the other hand, we are quite happy to have “short selling” going on all the time in the real world. We go to the store, find a TV we like but is “out of stock” and we buy it, for delivery in a few weeks. The store is “short selling” a TV to us. They don’t have if, and sold something that doesn’t exist… Everyone likes this… “Pay now, delivery in 6 weeks” is the norm for mail order (and defined in law as 6 weeks being the limit in the USA.)

    I think it is more a matter of scale than of nature. Having 75% of trades machine generated by Fat Wallets and having no “uptick rule” ( that gives time for YOU to sell your shares before the Bear Raid short sellers can sell them under you). Basically, Bear Raids work because the Sharp Operator can move faster than the average person and the only protection the retail investor had against classical Bear Raiders was the uptick rule, that was removed.

    Like most things, I think it is a matter of degree, not of kind…

    Selling naked options requires that you have enough cash to cover the bet if you bet wrong. I’m actually less bothered by them than by Bear Raiders. (though to control one requires controlling both, as they are connected via the “conversion” trade where options are turned into shorts…)

    @BobN:

    I’ve generally found that rotating between sectors is more ‘valuable’ than tracking any one company in detail. While classical investment theory would say otherwise (and I was a devoted follower of Value Investing for decades and own several versions of Ben Graham “Securities Analysis”…) the market is largely moved by “operators” and now “computer driven operator trades”; so moves by sector more than by company (other than on specific company news).

    The biggest problem with 2x and 3x leveraged funds is that they buy options and futures, and put the rest of the money in Treasuries to generate enough income to cover the options costs / rollover. With treasuries paying nearly nothing, they now don’t have enough cash to cover the costs. Add in the general “wasting asset” nature of options and you often get tickers that slowly erode to nothing over time. ( SO those vehicles are for fast trades only, not a ‘buy and hold’ nor even a “Leap”…) Basically, they are a way to hand off the management of an options position to someone else, so if you don’t know how to use options, stay out… That includes knowing how volatility changes impact the price of options.

    @R. de Haan:

    What is “market manipulation’?

    In oil markets, it is typically NOT real market manipulation, just traders moving prices to where they ought to be given current conditions and doing it faster than the “average Joe”.

    So oil is priced high now. Likely that is from folks buying futures contracts at higher delivery prices (bidding up the price) due to an expectation that there will be an Iran war of some kind. It is a ‘risk premium’. IF that problem does not develop, they can loose big when ‘delivery’ comes and they have oil nobody wants at that price. Would it be better to have prices be lower now, then suddenly jump up on the actual negative event? Perhaps. Or perhaps not.

    With the ability to “speculate”, companies like airlines can buy fuel at a known price well in advance and sell you vacation tickets at a known price. Would you rather NOT be able to buy your vacation flight in advance, and pay anywhere from $1000 to $4000 at the time you show up to get on the plane? Is it ‘better’ to pay $2000 known-in-advance instead of rolling those dice? Is that $1000 (or a $1500) price REALLY the “right one”?

    In short, one persons “market manipulation” is another persons “futures hedge” that lets them do business as usual and sell products for future delivery…

    IMHO, a “speculator” can not change equilibrium price, all they can do is change WHEN it shows up. So a “political risk” to the Strait Of Hormuz instead of showing up as $200 oil at the moment when it happens, shows up as a $40 uplift over a longer period of time as that future risk is priced into present prices based on the probability of the event. We consume a bit less now, more goes into storage “for that day”, and when the event happens, prices spike up, but to a lower degree as the stored oil comes out of storage at a profit.

    So which is better? NOT using futures to price in those risk premiums and having much larger price spikes on actual events? Or having the risk premium spread out over time and with folks able to contract in advance for “delivery during crisis” (or choosing not to pay extra for that guarantee…)?

Comments are closed.