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. 

Premarket trading plan summary

This should be a good day! Oil is up premarket and my COS.TO (COS.CA) should benefit from it. I’m still analyzing Canadian oil companies like Suncor Energy. I believe they represent probably the best opportunity out there for those who hold US dollars. This is mainly for two reasons.

The first reason is that when oil will go up, the stocks of those companies will also go up. Secondly is that the Canadian dollar versus the US is positively correlated to oil. Therefore, the potential is enormous.

As an example, let’s say I’m sitting on $10,000 USD that I want to trade/invest with. If I convert it to Canadian dollars I will have about $12,500 CAD. Let’s say I buy COS.CA at $9 per share it gives me about 1390 shares. If oil goes up and COS.CA goes back up to let say $12, and I sell them, I would get $16,680 CAD. Amazing right? Wait! Wait!

If oil goes up it also means the Canadian dollar will go up against the US dollar. So instead of CAD/USD at about 0.78 it could be 0.85 or even 0.9. If it’s 0.85 and I exchange my Canadian dollars back to USD I would now have around $14,200 USD. This is far more than if I would have invested in an equivalent US oil company.

I also see gold zigzagging around $1,170 an ounce and I’ll be watching miners closely today. Have a good trading day!

After hours trading summary

Today was a good day which saw FIVE up a bit more than 3%. However, oil dipped to lose all the gains from yesterday. I normally hang out on on forums and social medias related to trading or investing during the day, and I can see that opinions are polarized and vigorous when it comes to commodities.

The first group of people thinks that commodities are immensly overvalued and that they will sooner or later surge. The second group thinks that deflation will prevail and that commodities will continue their way down. The first group tend to see gold as money with intrinsic value. The second group sees gold as a useless piece of metal that can only be used in jewelries. Who's right?

The platonic truth is that both are right. Value is only created through the eyes of the one looking. Throughout history gold has been money, and then simply a tool used in jewelries. The value people put into anything follow the swing of a pendulum; from one extreme to another. If we admit that is the truth, then the only thing we can do is ask if gold is currently hated or loved by the pool of investors and traders. When most people think its only a tool, its the time to buy, and when most people think its money, its time to sell.

I believe that gold has been loved so much these last years, mostly because of the internet and the promotion gold has received, that this pullback is simply healthy. However, like Warren Buffett said:"Gold is basically being long on fear." 

Currently, people are not really scared. The US economy is "recovering" and world tensions seem to have eased. One can wonder what will happen when fear and consumer confidence sink? Gold will probably surge. For these reasons, I see gold more as an hedge than a speculative instrument.

Gold, miners, and their leveraged ETFs like NUGT and JNUG can be traded successfully. In my opinion however, they are not the easiest instruments to trade and make money with. The big advantage is that they will never go to zero. The big disadvantage is that big pockets with a variety of interests will try to influence them, and that may play against you.

That being said, I'm still watching miners to jump back in at one point. In the meantine I'm watching closely stocks like GPRO and TSLA who might turn out to be great opportunities.

Premarket trading plan summary

After the pop of yesterday thanks to the FED, commodities like oil and gold are sinking again this morning. That affects miners like GDX and GDXJ too. The US dollar is up against major currencies and continues to strengthen against assets.

 "Don't take that one day as a preview for the rest of the year though. Investors were largely reacting to language in the Fed statement suggesting that the central bank won't raise rates in April and will likely raise rates only a bit in June or later." - CNN Money 

The market we're in right now is not that complicated: When rates will rise, the stock market will go down. So, as long as the FED keeps this favorable environment alive for stocks, current valuation will stay in place.

My stock COS.CA will get hit today by lower oil price, but I bought it for a swing trade not a day trade. If not, I would have sold it yesterday when it was up 7.5%. I may buy other stocks today, depending on the market's direction. If I do, I will post my transactions here.

After hours trading summary

This was a roller-coaster day where the FED once again saved the market. The fear of a rates hike scared investors, but even if Yellen removed the word "patient" from her speech, rates will remain at their current level.

"The Fed was... far more dovish than what the market was looking for and that's why we rallied," said Krishna Memani, chief investment officer at Oppenheimer Funds. - Yahoo Finance

That automatically made everything from gold to oil to stocks surge. The only big loser was the US dollar against other currencies. 

That's why I transfered a lot of my US dollars in Canadian dollar to invest in oil stocks. I bought cos.to(cos.ca) at $8.97 CAD today, which already jumped 7%. What's even better is that when oil is moving up I'm profiting in two ways; first with the oil stock itself, and then with the strengthening of the Canadian dollar. For those of you who dont know, Canada's economy rely heavily on oil, so oil prices and their stock market are highly correlated.

The stock I bought yesterday, FIVE, didn't move a lot today, and I'm hoping for more action tommorow or friday.

Gold was on fire today after Yellen's speech, with miners up around 5% and NUGT up 15%. I may jump back in gold later this week or next week. 

How was trading for you today?

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?

After hours trading summary

Today was a good day; a 10% return day. I bought UWTI at $2.89 this morning and sold it close to todays high at $3.20. Yesterday morning I wrote the following in my post:

 “However, according to my model of oil, we should see USO hitting $18.60 this week at one point. This means UWTI should be back around $3.20 at one point. “

It happened to be extremely precise as of today.

However, I’m not writing that to brag about it, but to expose a mistake I did yesterday. I jumped in UWTI Monday at $2.85. At that moment, my analysis for USO that I published Tuesday was already complete. But instead of simply respecting my plan – which was to exit at $3.20 – I tried to be greedy. Yes, experienced or not, greed can cloud our vision. And so I went through the trouble of the following transactions:

2015-02-23 Long UWTI $2.85 2015-02-24 $3.00 5.26% $526.32 

2015-02-24 Long UWTI $3.00 2015-02-24 $2.89 -3.67% -$366.67 

2015-02-24 Long UWTI $2.89 2015-02-24 $3.20 10.73% $1,072.66 

When I could have simply kept my initial trade at $2.85 open for two days and achieve the same results. A lesson that I should learn again; if you trust your plan, stick to it.

Some of you might still be in UWTI and wondering why I got out. According to my probabilistic model for USO, the new probabilities are:

 P(USO>18.65)= 81.25%
 P(USO<18.65)= 18.75%

Which are still good odds, but I think there is better opportunity elsewhere for trading (I specified this because as an investment USO might be one of the best).

How was your day?

Pre-market trading plan summary

Oil is up pre-market which is a good news. I’m still holding UWTI at $2.85. I did some analysis this morning to confirm that I want to keep it and not sell it pre-market, and it is promising.

 Of course, oil is very volatile so we should expect swings. However, according to my model of oil, we should see USO hitting $18.60 this week at one point. This means UWTI should be back around $3.20 at one point.

Some interesting probabilities from my analysis for today are:

P(USO>18.11)= 98.75%
P(USO<18.11)= 1.25%

 If it goes up, I will set my take profits as I always do; in steps.

I know that a lot of traders are stuck in UWTI around $3.20-$3.30. Of course I can’t predict the future and I don’t recommend anything, but if I was in this situation (I would not be, because I use stop losses and would have been kicked out before) I would remain in UWTI and not sell from the time being. I would even maybe average down.

There’s also a rumor of the possibility of an OPEC emergency meeting. If you’re long oil, my opinion is to discard this news. If it doesn't happen, you won’t suffer from it if you have not based your decisions on it. If it does happen and you ignored it, you will have even more profit than you expected.

What do you think? - I wish you a good day trading and a lot of money! -