Crude Oil Prices: Playing the "Terror Premium"
By Bryan Bottarelli
In this article
In today's trading, crude-oil prices shot up to their highest levels of 2007.
Oil contracts touched a 6-month high of $68.09 in late Tuesday trading when unsubstantiated news broke that Iran had attacked a U.S. ship.
A quiet resolution of the Iran/U.K situation could witness a down-move in oil prices as the terror premium evaporates.
Crude Oil Prices: Playing the “Terror Premium”
In today's trading, crude-oil prices shot up to their highest levels of 2007. Crude was up 2%, hitting $64.20 a barrel on the New York Mercantile Exchange, which represents the highest intraday price since December 22nd -- and this price increase was a direct result of tensions between Iran and the United Kingdom.
In fact, oil contracts touched a six-month high of $68.09 during late- Tuesday trading when unsubstantiated news broke that Iran had attacked a U.S. ship. But the Pentagon would not discuss the matter -- which indicates that the rumors were false.
Nevertheless, it goes to show you just how sensitive oil prices are to geo-political events. You see, oil prices are increasing because the Iran/U.K. situation ignites worldwide concerns about supply disruptions in the Persian Gulf. But like so many other events on Wall Street, it looks like these concerns are being overblown -- which creates a “terror premium” where you see oil prices move up too far, too fast.
Crude Oil Prices: Trumping Reality
James Williams, an economist at WTRG Economics, summarized the situation best by saying, “Perception is trumping reality in the futures market, as a halt to the flow of crude from Iran is extremely unlikely as is an invasion of Iran.”
Read more… Get Market Report everyday! Sign up Free!
No matter if you think oil prices are overinflated or not, this is the reality of the situation. So as a trader, I think it's best that you use this terror-induced price jump to make money trading the top oil names.
For example, the combined value of the WOW oil play that Adam and I are holding (that we actually added to on two separate occasions) is now squarely in the black. In fact, even our original entry price is on the verge of breaking into profitability -- and that's a clear-cut sign that you should take your money off the table on any further oil price pops.
After all, a quiet resolution of the Iran/U.K situation could witness a down-move in oil prices as the terror premium evaporates -- so I want to be sure that everyone uses the current price increases to best capitalize on our call option plays. If that means taking quick profits, than that's what we'll do!
***
Bryan Bottarelli is the head trading tactician for the WaveStrength Group, and is a contributing editor for Taipan Financial News. Coming off the floor of the Chicago Board Options Exchange (CBOE), Bryan uses WaveStrength chart forecasting to develop wining options plays for his service called WaveStrength Options Weekly. Bryan is also the lead editor of BottarelliResearch, an elite membership service that he independently publishes himself.
Did you like this article? Get Market Report everyday! Sign up Free!
Related Articles
Healthcare Investing: Think the Healthcare Sector is Strong?
Options Trading: All It Takes Is One Announcement
Market Sector Investments: Equating Sector Study into Profits
Related Resources
Oil Prices: Crude Tops $64 a Barrel. - Yahoo!Finance
OIH: Oil Service Quote - MarketWatch.com