Exploring Bearish Plays w/ Futures, Micros & Options on FutureIntroduction
The WTI Crude Oil futures market provides various avenues for traders to profit from bullish and bearish market conditions. This article delves into several bearish strategies using standard WTI Crude Oil futures, Micro WTI Crude Oil futures contracts, and options on these futures. Whether you are looking to trade outright futures contracts, construct complex spreads, or utilize options strategies, this publication aims to assist you in formulating effective bearish plays while managing risk efficiently.
Choosing the Right Contract Size
When considering a bearish play on WTI Crude Oil futures, the first decision involves selecting the appropriate contract size. The standard WTI Crude Oil futures and Micro WTI Crude Oil futures contracts offer different levels of exposure and risk.
WTI Crude Oil Futures:
Standardized contracts linked to WTI Crude Oil with a point value = $1,000 per point.
Suitable for traders seeking significant exposure to market movements.
Greater potential for profits but also higher risk due to larger contract size.
TradingView ticker symbol is CL1!
Margin Requirements: As of the current date, the margin requirement for WTI Crude Oil futures is approximately $6,000 per contract. Margin requirements are subject to change and may vary based on the broker and market conditions.
Micro WTI Crude Oil Futures:
Contracts representing one-tenth the value of the standard WTI Crude Oil futures.
Each point move in the Micro WTI Crude Oil futures equals $100.
Ideal for traders who prefer lower exposure and risk.
Allows for more precise risk management and position sizing.
TradingView ticker symbol is MCL1!
Margin Requirements: As of the current date, the margin requirement for Micro WTI Crude Oil futures is approximately $600 per contract. Margin requirements are subject to change and may vary based on the broker and market conditions.
Choosing between standard WTI Crude Oil and Micro WTI Crude Oil futures depends on your risk tolerance, account size, and trading strategy. Smaller contracts like the Micro WTI Crude Oil futures offer flexibility, particularly for newer traders or those with smaller accounts.
Bearish Futures Strategies
Outright Futures Contracts:
Selling WTI Crude Oil futures outright is a straightforward way to express a bearish view on the market. This strategy involves selling a futures contract in anticipation of a decline in oil prices.
Benefits:
Direct exposure to market movements.
Simple execution and understanding.
Ability to leverage positions due to margin requirements.
Risks:
Potential for significant losses if the market moves against your position.
Mark-to-market losses can trigger margin calls.
Example Trade:
Sell one WTI Crude Oil futures contract at 81.00.
Target price: 76.00.
Stop-loss price: 82.50.
This trade aims to profit from a 5.00-point decline in oil prices, with a risk of a 1.50-point rise.
Futures Spreads:
1. Calendar Spreads: A calendar spread, also known as a time spread, involves selling (or buying) a longer-term futures contract and buying (or selling) a shorter-term futures contract with the same underlying asset. This strategy profits from the difference in price movements between the two contracts.
Benefits:
Reduced risk compared to outright futures positions.
Potential to profit from changes in the futures curve.
Risks:
Limited profit potential compared to outright positions.
Changes in contango or backwardation could hurt the position.
Example Trade:
Sell an October WTI Crude Oil futures contract.
Buy a September WTI Crude Oil futures contract.
Target spread: Decrease in the difference between the two contract prices.
In this example, the trader expects the October contract to lose more value relative to the September contract over time. The profit is made if the spread between the December and September contracts widens.
2. Butterfly Spreads: A butterfly spread involves a combination of long and short futures positions at different expiration dates. This strategy profits from minimal price movement around a central expiration date. It is constructed by selling (or buying) a futures contract, buying (or selling) two futures contracts at a nearer expiration date, and selling (or buying) another futures contract at an even nearer expiration date.
Benefits:
Reduced risk compared to outright futures positions.
Profits from stable prices around the middle expiration date.
Risks:
Limited profit potential compared to other spread strategies or outright positions.
Changes in contango or backwardation could hurt the position.
Example Trade:
Sell one November WTI Crude Oil futures contract.
Buy two October WTI Crude Oil futures contracts.
Sell one September WTI Crude Oil futures contract.
In this example, the trader expects WTI Crude Oil prices to remain relatively stable.
Bearish Options Strategies
1. Long Puts: Buying put options on WTI Crude Oil futures is a classic bearish strategy. It allows traders to benefit from downward price movements while limiting potential losses to the premium paid for the options.
Benefits:
Limited risk to the premium paid.
Potential for significant profit if the underlying futures contract price falls.
Leverage, allowing control of a large position with a relatively small investment.
Risks:
Potential loss of the entire premium if the market does not move as expected.
Time decay, where the value of the option decreases as the expiration date approaches.
Example Trade:
Buy one put option on WTI Crude Oil futures with a strike price of 81.00, expiring in 30 days.
Target price: 76.00.
Stop-loss: Premium paid (e.g., 2.75 points x $1,000 per contract).
If the WTI Crude Oil futures price drops below 81.00, the put option gains value, and the trader can sell it for a profit. If the price stays above 78.25, the trader loses only the premium paid.
2. Synthetic Short: Creating a synthetic short involves buying a put option and selling a call option at the same strike price and expiration. This strategy mimics holding a short position in the underlying futures contract.
Benefits:
Similar profit potential to shorting the futures contract.
Flexibility in managing risk and adjusting positions.
Risks:
Potential for unlimited losses if the market moves significantly against the position.
Requires margin to sell the call option.
Example Trade:
Buy one put option on WTI Crude Oil futures at 81.00, expiring in 30 days.
Sell one call option on WTI Crude Oil futures at 81.00, expiring in 30 days.
Target price: 76.00.
The profit and loss (PnL) profile of the synthetic short position would be the same as holding a short position in the underlying futures contract. If the price falls, the position gains value dollar-for-dollar with the underlying futures contract. If the price rises, the position loses value in the same manner.
3. Bearish Options Spreads: Options offer versatility and adaptability, allowing traders to design various bearish spread strategies. These strategies can be customized to specific market conditions, risk tolerances, and trading goals. Popular bearish options spreads include:
Vertical Put Spreads
Bear Put Spreads
Put Debit Spreads
Ratio Put Spreads
Diagonal Put Spreads
Calendar Put Spreads
Bearish Butterfly Spreads
Bearish Condor Spreads
Etc.
Example Trade:
Bear Put Spread: Buying the 81.00 put and selling the 75.00 put with 30 days to expiration.
Risk Profile Graph:
This example shows a bear put spread aiming to profit from a decline in WTI Crude Oil prices while limiting potential losses.
For detailed explanations and examples of these and other bearish options spread strategies, please refer to our published ideas under the "Options Blueprint Series." These resources provide in-depth analysis and step-by-step guidance.
Trading Plan
A well-defined trading plan is crucial for successfully executing any strategy. Here’s a step-by-step guide to formulating your plan:
1. Select the Strategy: Choose between outright futures contracts, calendar or butterfly spreads, or options strategies based on your market outlook and risk tolerance.
2. Determine Entry and Exit Points:
Entry price: Define the price level at which you will enter the trade (e.g., breakout, UFO resistance, indicators convergence/divergence, etc.).
Target price: Set a realistic target based on technical analysis or market projections.
Stop-loss price: Establish a stop-loss level to manage risk and limit potential losses.
3. Position Sizing: Calculate the appropriate position size based on your account size and risk tolerance. Ensure that the position aligns with your overall portfolio strategy.
4. Risk Management: Implement risk management techniques such as using stop-loss orders, hedging, and diversifying positions to protect your capital. Risk management is vital in trading to protect your capital and ensure long-term success.
Conclusion
In this article, we've explored various bearish strategies using WTI Crude Oil futures, Micro WTI Crude Oil futures, and options on futures. From outright futures contracts to sophisticated spreads and options strategies, traders have multiple tools to capitalize on bearish market conditions while managing their risk effectively.
When charting futures, the data provided could be delayed. Traders working with the ticker symbols discussed in this idea may prefer to use CME Group real-time data plan on TradingView: www.tradingview.com This consideration is particularly important for shorter-term traders, whereas it may be less critical for those focused on longer-term trading strategies.
General Disclaimer:
The trade ideas presented herein are solely for illustrative purposes forming a part of a case study intended to demonstrate key principles in risk management within the context of the specific market scenarios discussed. These ideas are not to be interpreted as investment recommendations or financial advice. They do not endorse or promote any specific trading strategies, financial products, or services. The information provided is based on data believed to be reliable; however, its accuracy or completeness cannot be guaranteed. Trading in financial markets involves risks, including the potential loss of principal. Each individual should conduct their own research and consult with professional financial advisors before making any investment decisions. The author or publisher of this content bears no responsibility for any actions taken based on the information provided or for any resultant financial or other losses.
