Liberty Trading Option Writers Report

By: James Cordier, Michael Gross
Liberty Trading Group

September 3, 2011

Crude Oil: Despite US weakness, Global Demand continues to Support

September 6, 2011

Last week brought with it another round of gloomy economic data surrounding the US economy. With labor statistics showing zero jobs added in August, consumer confidence at its lowest levels since the credit crisis of 2008, and many economist now mentioning the "R" word with disturbing regularity, one would think that energy prices would be headed into a tailspin.

OptionSellers.com's James Cordier gives
quarterly Oil Price Outlook on FOX
BUSINESS NEWS - September 1, 2011.

Yet crude prices have proved surprisingly resilient through 2011. Why?

In The Complete Guide to Option Selling, we suggest one of the core covenants of selling options is knowing the fundamentals of your market. In crude oil, that means supply and demand. One reason crude prices continue to hold firm is that demand for gasoline in the United States tends to remain fairly stable with only slight fluctuations based on economic conditions. It is true that when pump prices climbed over $4.00 per gallon with unemployment over 9%, demand scaled back a few ticks. But Americans are more likely to consider driving their vehicles a necessity and less likely to slate gasoline purchases as "discretionary spending." In the largest oil consuming country in the world, that is one engine that not only keeps crude demand relatively stable but actually growing, even as the economy slows.

But the real story of crude price strength is not coming from the shores of the United States.

Chinese Growth Picks up Demand Slack

While economist wonder how long China can continue to be the pump that keeps the rest of world economy on life support, the Chinese consumer seems to have no such doubts. The growing middle class has produced a surge in demand for automobiles, that shows no signs of weakening any time soon.

Chinese auto sales surged 32% last year, overtaking the US as the world's largest automobile market. According to Reuters world news, the Chinese automobile industry is expecting a similar year over year increase in 2011, despite global economic worries.

Vehicles on the Road

The growth of the Chinese middle class has produced a surge in demand for automobiles. This in a country where only 20 years ago, virtually nobody owned a car.

Globally, China is expected to account for over 50% of the demand growth for Liquid fuels in the next 2 years. Despite a slight drop in demand here in the US in 2011, the EIA expects world consumption to grow by 1.4 million barrels per day in 2011 and another 1.6 million barrels per day in 2012 - setting new records for global petroleum usage. Nearly all demand growth is expected to come from outside of the US and Europe - indicating the EIA is already pricing in weak economies in the West.

Liquid fuel consumption hit a record high 86.8 million barrels per day in 2010. New record consumption levels are expected to be reached again in 2011 and 2012, despite slack demand from the US and Europe.

This is the story you don't get in the nightly news. And it is also the reason why oil prices remain in the mid $80 range, despite calls for a US recession and continued worries about Europe. Remember when Standard and Poors downgraded the US credit rating and the stock market crashed? Oil was initially effected, but bears were unable to hold it below the $80 level. The two charts above are a big reason why.

Outlook and Strategy

With US economic data "wobbly" at best, and little faith in the current administration to grasp how a capitalist economy works - let alone do anything about it, we are not economy bulls at the present moment. Nonetheless, demand figures from China and much of the rest of the "emerging" economies continue to suggest that they can pick up the slack left by the troubles being experienced in the US and Europe.

At the same time, the economic malaise that continues to plague the West is not going to go away anytime soon. This should keep a cap on the upside of crude prices for some time. One of the reasons to sell options is that you do not have to pick market direction. And as an option seller in crude oil, you do not. However, should the administration announce some new type of stimulus in September, we would view a crude oil rally back to the $90 level as a call selling opportunity. Strikes at the $130 to $140 per barrel level should offer an excellent premium to risk ratio.

Should economic figures continue to disappoint in September, look at dips below the $80 level as opportunities for selling puts. The $55 strike looks like fertile ground to take premium but lower strikes could become available depending on the severity of the news. We advise going out to March contracts or beyond to take larger premiums (target over $500 per option).

Selling puts and calls in the same market is called a "Strangle" or a "Bracket" in option selling lingo. Times of increasing volatility are typically the best times for writing strangles. With the promise of more headlines out of Washington and Europe in September, strangle writers should welcome any price volatility that occurs.

Our friends in the Far East are still there to help stablize things.

If you are an accredited investor interested in getting started with your Option Selling Account this month, call 800-346-1949 (813-472-5760 international). New client membership is limited and waiting list may apply. ($250,000 minimum investment).

To learn more about selling commodities options in an investment account, request your FREE Option Seller Starter Pack at www.OptionSellers.com Your pack includes a special investment plan for high net worth investors, examples of option selling positions and a 30 minute Video DVD.

813-472-5760 (International)

James Cordier is the founder of Liberty Trading Group/OptionSellers.com, an investment firm specializing in managed option writing portfolios. James' market comments are published by several international financial publications and worldwide news services including The Wall Street Journal, Reuters World News, Bloomberg Television News and CNBC. Michael Gross is an analyst with Liberty Trading Group/OptionSellers.com. Mr. Cordier's and Mr. Gross' book, The Complete Guide to Option Selling (McGraw-Hill 2005) is available at bookstores and online retailers now.

***The information in this article has been carefully compiled from sources believed to be reliable, but it's accuracy is not guaranteed. Use it at your own risk. Hypothetical profit and loss examples used herein do not include transaction costs. There is risk of loss in all trading. Past performance is not necessarily indicative of future results. Traders should read The Option Disclosure Statement before trading options and should understand the risks in option trading, including the fact that any time an option is sold, there is an unlimited risk of loss, and when an option is purchased, the entire premium is at risk. In addition, any time an option is purchased or sold, transaction costs including brokerage and exchange fees are at risk. No representation is made that any account is likely to achieve profits or losses similar to those shown, or in any amount. An account may experience different results depending on factors such as timing of trades and account size. Before trading, one should be aware that with the potential for profits, there is also potential for losses, which may be very large. All opinions expressed are current opinions and are subject to change without notice.

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