By Darrell Martin
Did you know that every week the Energy Information Administration’s (EIA) releases a Crude Oil Inventory report? This report is released each Wednesday at 10:30 AM ET. It measures the weekly change in the number of barrels of commercial crude oil held by US firms. The amounts held in these inventories directly influence the price of petroleum products, which in turn, can have an influence on inflation.
Since it can be assumed this report will cause movement in the Crude Oil Market, consider the following:
- Timing:
When will the market move? The market tends to move around the time the report is released.
- Distance:
How far is the market expected to move? There are deviation levels as well as other methods to aid in this computation.
- Risk and Reward:
Have a target goal of 1:1 risk/reward ratio or better. This means for every $20 at risk, expect the market to move fast enough and far enough to make a potential profit of $20. The release of the crude oil inventory report offers the opportunity to use strategies for when movement is known, but direction of movement is unknown. Two such strategies are the strangle, used with binary options and the straddle, used with spreads. This article will detail the strangle.
Get access each week to the crude oil inventory report at US Energy Information Administration. An ample supply expects the price to drop. If the report has a lower number than expected, this means a drop in supply, so expect the price to rise.
With the strangle strategy, if the market goes up or down far enough, profit can be made on the movement caused by the news report. Check the deviation levels to see the expectation on distances. The expected distance of movement changes on a daily basis. Seventy percent of the time, the market will move up or down one deviation level. Knowing the potential distance the market might move can help when panning trades.
To set up the trade, buy a binary above the market and within the expected move, taking into consideration how much time must be allowed for the market to move the expected distance. At the same time, sell a binary below the market with a time and distance to give a risk/reward of 1:1 or better. Sell the binary with a strike below where the market is currently trading.
To figure out the amount risked on each side of the trade, the buying side risk is the price paid to for the binary. If it was bought for $10, the risk is $10. When selling, the risk is $100 less the sold price. If it was sold at $90, the risk would be $100 - $90 for a risk of $10 on this leg of the strangle.
Remember the goal is a risk/reward of 1:1 or better. Combine the risk of both binaries together. Using the example above, there was $10 on the bought binary and $10 on the sold binary for a total $20 risk. Therefore, the expectation should be that oil will move far enough to recover the original $20 at risk on one of the legs of the strangle and make a profit of $20 for a risk/reward of 1:1.
For this strategy, expect one side to profit and one side to lose. In this example, the losing leg would lose $10, so the profitable leg needs to make $30: $10 to cover the losing leg and $20 to make the risk/reward 1:1. The total net profit goal of the profitable leg needs to equal $30.
On this low risk trade, the worst-case scenario would be for the market to remain flat allowing both sides to lose the $20 originally invested. However, when trading with Nadex, exit the trade at any time to lower the loss on the trade.
Learn more about deviation levels and trading news events at Apex Investing, where all education is free.