Option Investor
Commentary

A Strong Dose of Ugly

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This week was not fun! I cringed each day as oil prices imploded and oil stocks were taken out and shot. The good news is that the current levels represent a great entry point for adding to positions. I have repeatedly suggested adding to positions under $50 and last week's drop took crude back to very near the 200-day average at 47.54. I consider this a very strong entry point. The December contract is holding at $52 and well above its 100-day average at $49.90. This represents confirmation to me that the big money still believes oil will be much higher before year end.

The markets dealt us some blows to oil but we are protected with the insurance puts. I believe the majority of the selling was an effort by hedge funds to raise cash to cover losing positions or withdrawals. The oil inventory levels were only slightly higher and nothing to create this panic selling. The sudden rise in the dollar also helped devalue oil but the end result will be the same. They are not making any more oil and we are burning it at the rate of 85 million barrels per day. We have plenty of time to be right and we are protected with insurance from being wrong.

Our single watch list entry, CHK, was triggered on Friday at $19. That gives us more positions than my $10K budget and I am going to drop JBLU as a non-performer. JBLU did not break down with the market and given the drop in oil it is holding near resistance.

Next week is a tossup for me and I could build a convincing argument for both directions. I still believe we will see Dow 9800 but maybe not next week. We still have strong overhead resistance, declining volume and zero conviction on the upside. Shorts are getting braver and the hedge fund rumor continues to spook the market.

I don't want to add any more positions but I did see another put opportunity I could not resist. I added CCU to the watch list in anticipation of taking profits on OSTK or TOO.

I added several cautionary exits on the insurance puts on oil. If we do get a continued drop I want to take profits on the puts and reduce our costs in the leaps.
 

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