The market's been such a roller coaster ride lately. Dow at 14000, 13000, 14200, 12800, then 13600 today. I know many "pundits" would tell you it's a bad investing environment, and want to put your cash on the sideline. Well...i know my readers won't fall for that.
Lets' concentrate on oil. We all know gas in southern Cali is not $4 a gallon. What economics does that reflect? Short term volatility poses good opportunity. Oil is no longer predictable like the 90s. They were either on the rise, or down with little short term volatility. In recent weeks, prices of oil has fluctuated more than 15% on OPEC decisions and Iran issues. It is wise to try and capture profit from these momentum swings. A conservative hedge in this trading strategy is using a three-way trade. Allows investor to bet on the upside or downside while maintaining a hedge in case of sudden shifts.
Here's how three-way trade works: each trade consists of a futures contract combined with a pair of options. A call and a put. A futures contract is an agreement to buy oil at a certain price today and collect it at a later date, regardless of its future value. Options are contracts that allow the buyer the right to buy (a call) or sell (a put) an asset an agreed-upon price during a specified time frame. Traders use puts as protection when they expect a price to drop, and buy calls at a low price when they expect the price to go up.
How you should structure the three-way trade would depend on whether oil seems headed up or down. When oil prices are on the rise, I would buy a futures contract, sells a call, and buys a put. But since oil prices have marched downward in the past three weeks, I have inverted the formula to instead sell futures contracts, buy calls, and sell puts.
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