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Using Long Option Straddle Positions on Crude Oil

July 2008 Monthly Market Memo

Economic Reports and Expiration Notices

July 9nd, 2008 — Issue #436

Using Long Option Straddle Positions on Crude Oil

by Jonathan Day, Senior Broker with Cannon Trading Co., Inc.

In the last year, crude oil futures have risen more than 100% in price from a low of $61 to a high of $145.85.

In such a volatile market, what options strategies can we use to try to minimize our risk exposure when trading crude oil futures?

In this article, I will discuss such a strategy: the long option straddle position.

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July 2008 Monthly Market Memo

by MF Global Research

The Monthly Market Memo offers an outlook for July in debt markets, equity markets, currencies, precious metals, energies, grains, and CRB, as well as trade recommendations.

Memo Preview

DEBT MARKETS

Trade the treasury futures with an upside bias. Look for TYU8 to range from 114-145 to 118-000. The bullish case is justified by on-going economic deterioration both domestically and internationally. Domestically, the housing market remains under pressure as refinance activity stays anemic and purchases are lackluster. Consumers remain beleaguered by stubbornly buoyant commodities prices, wealth destruction, a soft labour market and limited mediums for income. Average hourly earnings are rising at their slowest level of per annum growth since 2006 and Freddie Mac cash-out refinance numbers for Q1 dropped to $29B, the lowest level in four years. The economic situation abroad is equally dismal. The Japanese Eco-Watchers Current Outlook survey fell to 29.5 in June, the lowest level since October 2001. Euro-Zone confidence is suffering similar declines. Sentix Investor Confidence is down 127% Y/Y while the sovereign economic benchmark, Germany, is witnessing larger-than-expected drops in industrial orders and production. The emerging economies are also losing footing with New Zealand on the verge of recession and China digesting YTD stock market declines in the neighborhood of 50%. Credit will also provide a tailwind to higher treasury prices. The doubt surrounding the stability of GSE balance sheets alongside the persistent write-down and downgrades of the financial sector leave the market wondering when the credit dislocation will end. Expect credit tension to persist though the release of bank earnings next week when greater clarification of the health of the banking sector will be provided. Note also that credit risk indicators are back at their March 2008 levels. The 10-yr swap spread is flirting with 80bps and high-yield is trading poorly. Persistent inflationary pressure in energy and food alongside a re-bound in the equity markets stand as the major head winds to higher treasury prices. Look for the yield curve to continue to steepen as Fed rate hike expectations are diminished.

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Economic Reports and Expiration Notices

Source: Moore Research Center, Inc.

* Please note that the information contained in this letter is intended for clients, prospective clients, and audiences who have a basic understanding, familiarity, and interest in the futures markets.

** The material contained in this letter is of opinion only and does not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results.

*** This is not a solicitation of any order to buy or sell, but a current market view provided by Cannon Trading Inc. Any statement of facts herein contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgment in trading!