Higher wholesale fuel prices were noticeably passed along to retail end users this week, causing service stations throughout the country to raise retail gas and diesel prices. Other commodities including; sugar, gold, and copper, continue to print new yearly highs on a daily basis. The Federal Open Market Committee will be carefully monitoring this rise in commodity inflation for signs higher costs are penetrating core inflation.
Speculators are not waiting for more inflation data analysis. The May contract for Fed's funds futures are pricing in an 85% probability that the FOMC will raise interest rates 50 points in April.
The Fed is unlikely to make any interest rate move during its November 2nd and 3rd meeting. However, energy investors will want to pay close attention to any change in previous rhetoric signalling a rise in interest rates will be a viable consideration.
The Fed will not make a move until improved employment data and rising core inflation give them the go ahead. Historically the Fed has never raised interest rates until total unemployment, currently at 9.8%, began to decline. Continued rising commodity prices likely will force their hand to raise rates in April.
Saturday, October 24, 2009
Sunday, October 18, 2009
Energy Bulls Have Nothing to Fear From the Obama Administration
Crude and refined products broke out higher from well entrenched trading ranges this week. The catalyst was surprise inventory draws in gas and distillates. The underlying driving forces are low US interest rates to finance trades and a weak US dollar supporting energy prices.
The US Federal Open Market Committee should have learned the consequences of a weak US dollar when the dollar vs the euro was trading at $1.60 and crude at $147. On Friday crude closed at $78.47 and the dollar at $1.4967.
Quite simply, the Fed needs to raise interest rates now, or at least begin rhetoric advising it might be a near term consideration. Without any fear at all of an imminent interest rate hike, the dollar will continue to slide, trades will be financed on the cheap, and crude has nothing stopping it from cruising to $90 by year end.
The US Federal Open Market Committee should have learned the consequences of a weak US dollar when the dollar vs the euro was trading at $1.60 and crude at $147. On Friday crude closed at $78.47 and the dollar at $1.4967.
Quite simply, the Fed needs to raise interest rates now, or at least begin rhetoric advising it might be a near term consideration. Without any fear at all of an imminent interest rate hike, the dollar will continue to slide, trades will be financed on the cheap, and crude has nothing stopping it from cruising to $90 by year end.
Saturday, October 10, 2009
"Wee" Willie Keeler "I keep my eyes clear and hit 'em where they ain't."
"Wee" Willie Keeler played baseball for the New York Giants from 1892 to 1910. At 5'4" and 140 pounds, he was the smallest player ever in the major leagues. The bat he used was only 30 inches long and weighed 29 ounces. Similar size and weight as an eight year old boy's little league bat.
Amazingly he had a streak of eight seasons with 200 or more hits, matched only in later years by Pete Rose. When asked how he was able to accomplish this achievement Mr. Keeler stated, "I keep my eyes clear and hit 'em where they ain't." Successful energy option sellers strictly adhere to the same philosophy.
When selling energy options knowing where the underlying commodity price is going has value. Knowing whether the market is trending or range bound will help to gain a little extra premium on the sale. Vitally important, however, is knowing where the price is definitely not going.
Just as "Wee" Willie would scan the field to see where the opposing players were positioned, so too energy option sellers need to understand historical and seasonal price tendencies to have a high level of confidence that the sold option will expire unexercised and maximum profitability on the trade will be obtained.
Amazingly he had a streak of eight seasons with 200 or more hits, matched only in later years by Pete Rose. When asked how he was able to accomplish this achievement Mr. Keeler stated, "I keep my eyes clear and hit 'em where they ain't." Successful energy option sellers strictly adhere to the same philosophy.
When selling energy options knowing where the underlying commodity price is going has value. Knowing whether the market is trending or range bound will help to gain a little extra premium on the sale. Vitally important, however, is knowing where the price is definitely not going.
Just as "Wee" Willie would scan the field to see where the opposing players were positioned, so too energy option sellers need to understand historical and seasonal price tendencies to have a high level of confidence that the sold option will expire unexercised and maximum profitability on the trade will be obtained.
Saturday, October 3, 2009
Why Are Only 20% of Energy Commodities Traders Successful?
Most energy traders, professional and amateur, are drawn to energy commodities futures trading because they are aware of the potential for very large profits, using little capital. However, knowing the difference between potential profit and potential for profit is what separates skilled traders from the pack. This is especially true in energy commodities options trading.
Numerous studies have shown that 80% of commodities options expire worthless. While commercial traders may be offsetting these losses with gains on the physical product price movements, the vast majority of traders are unhedged and experiencing pure losses. The problem is that most traders plan a trade based solely on profit expectations and not on the probability of exiting the trade profitably.
Energy options traders are particularly vulnerable to this trap. The leveraged based margin requirements of commodities allows a trader to control a large position using relatively small premium. Traders will often receive additional incentive from their options broker reminding clients that the risk in buying a put or call is limited to the premium paid.
The problem is that the options buyer is not much different than someone trying to beat the house in Las Vegas. That is why I prefer to be the house by selling options, rather than trying to beat the house by buying options.
By selling options, I am limiting the potential for profits. I am also exposing myself to unlimited risk. However the reason this strategy works so well is that I have improved my probability of success to 80%.
Just like the Vegas casinos I have to have enough capital on hand so I can pay out the occasional losing trades. However, by carefully monitoring the market I am trading, I am able to limit these losses by exiting losing trades early and allowing the winning trades to provide a steady income stream.
Numerous studies have shown that 80% of commodities options expire worthless. While commercial traders may be offsetting these losses with gains on the physical product price movements, the vast majority of traders are unhedged and experiencing pure losses. The problem is that most traders plan a trade based solely on profit expectations and not on the probability of exiting the trade profitably.
Energy options traders are particularly vulnerable to this trap. The leveraged based margin requirements of commodities allows a trader to control a large position using relatively small premium. Traders will often receive additional incentive from their options broker reminding clients that the risk in buying a put or call is limited to the premium paid.
The problem is that the options buyer is not much different than someone trying to beat the house in Las Vegas. That is why I prefer to be the house by selling options, rather than trying to beat the house by buying options.
By selling options, I am limiting the potential for profits. I am also exposing myself to unlimited risk. However the reason this strategy works so well is that I have improved my probability of success to 80%.
Just like the Vegas casinos I have to have enough capital on hand so I can pay out the occasional losing trades. However, by carefully monitoring the market I am trading, I am able to limit these losses by exiting losing trades early and allowing the winning trades to provide a steady income stream.
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