How to trade or invest in oil in this market

A couple of months ago, WTI crude oil was selling for more than $100 a barrel. If you would have told a trader or an investor that WTI crude oil would be fighting to reach $50 today, he would probably have laughed at you. But today, traders and investors were cheering oil which saw WTI rise 3.6% to $49.21 a barrel. Is this the sign of a new trend, or is it simply short term noise fuelled by news like what's happening in Yemen? And more specifically, how to turn out a profit trading or investing in oil companies in that environment?

How to invest in oil?

According to traders and investors I see arguing over oil prices on social medias, oil will go down, up, or sideways. Who's right? My answer will both disappoint and relieve you; they are all right. The reality is that asking where oil is going is asking the wrong question. Over long periods of time, we know that oil will fluctuate a lot from undervaluation to overvaluation, that's a fact of the "free" markets. Will oil go up in the long run? Of course it will! But do you have the patience to wait the time that it takes? If you're in for the long run, then buying oil now could turn out to be a lucrative idea. You could also buy puts options as insurance if you're scared oil might go dramatically down. They will protect the value of your shares, as your house insurance protects the value of your home. 

How to trade oil?

If you're a trader, then you don't have months or years in front of you to get your money back. You want your money in, and you want your miney out, with a profit. Why gamble by choosing a direction when you can bet on volatility? Oil volatility is near its peak as you can see on the chart below.

One strategy would be to buy a call option and a put option at the same strike price and same expiration. You would lose your premiums if oil move sideways, but you will make money if oil moves either up or down. However, if your expiration date is far enough, it is highly improbable that volatility will suddently remain flat until your options expire. 

Ask yourself the right question

Instead of trying to guess where oil is going, try to understand your position and what you want to do exactly. Then, adopt the right strategy for your position. Trying to guess day after day if oil will go up or down is a receipe for a lot of stress, frustration, and potentially portfolio disaster. 

After hours trading summary

Today was another good day with close to 6% return. I entered RUSS at $11.85 pre-market and sold it at $12.54 this afternoon. One of the main reason for RUSS surging was oil tanking. USO has been in roller-coaster mode from yesterday to today.

I spent some time on StockTwits.com today on the RUSS channel, and while watching the twits I noticed that many trader don’t really know when to sell.

They do their analysis to find an entry point and then they either guess an exit price or they get a fixation on a specific price. Hey, maybe this works for some traders, I don’t know, but it’s not an optimal strategy in my opinion. The truth, that a lot of traders try to prove wrong, is that nobody can predict how high it will go.

Does that mean there is no way to control your profit and exit price? No! The way to do it is to simply increase your “take profit” orders as the price increases. Take my RUSS trade of today as an example.

I didn’t exit at $12.54 by guessing. When RUSS was at $12.20, I set a take profit at $12.10, when it was $12.30 I set a take profit at $12.20, etc. When it was $12.65 I set a take profit at $12.55, and it got executed selling my position at $12.54.

Was that a good result? Yes, it was very close to the top actually. RUSS went down after this tipping point.

Do you already use this strategy or another one? Share with our readers! Don’t be shy.

Pre-market trading plan summary

Yesterday was a really good day for oil and Russia profited from it as was showing RSX up almost 2% and RUSL up 5%. I think RSX is one of the best investment to have in a long term portfolio. However, I think that we will see it going down today even if it’s up about 1% pre-market.

One of the reason is that we may see a pullback in oil today and an attractive price to short RSX (close to $18.00).

According to my morning analysis, we have approximately 9% chance to see RSX up today and 91% to see it going down. That being said, it is necessary to pull the trigger at the right moment because volatility is expected. If the opportunity to buy low and sell high presents itself and you don’t seize it, you might be stuck with a dipping ETF tomorrow.

I entered RUSS at $11.85 pre-market and I have a stop-loss set at $11.50. I think RSX might go down to the low $17s, and if it happens that’s when I’m going to start placing take profits for RUSS.

What is your plan for today?