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

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 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! -

Pre-market trading plan summary

One of the biggest quality a trader can have is the capacity to adapt. And so, every morning it is important to align your weekly plan with the new information you have and make necessary changes.

Like I wrote yesterday in my newsletter, gold and particularly miners represented by GDX and GDXJ are down big time pre-market. I don’t want to be involved this week with gold or gold miners except if there are some unexpected and exceptional changes.

UGAZ is not surprisingly up, like I wrote in my newsletter it could continue to climb. However, what’s the possible gains in the short term? Limited, in my opinion.

DWTI is particularly interesting, because we might see oil plummet back to $45. However, I won’t buy DWTI because the bid-ask spread is an enormous 5%.

I’m watching UWTI closely for an entry point, and I’ll be buying at $2.85 and lower.