Gasoline Futures Bottoming Out?
by Marc Cholly
Gasoline prices traditionally bottom out in January and February because demand is usually low at this time of year. As spring approaches, the refineries will start getting ready for the heightened demand by increasing gasoline production to prepare for the summer driving season. Gasoline prices usually rise as we get into the summer due to increased demand from people taking vacations and being out and about.
The Energy Information Administration (EIA) recently projected retail gasoline prices will hit nearly $4 a gallon by June. Front-month March reformulated gasoline blendstock futures (RBOB) traded near $2.26 a gallon, down nearly 4.93 cents on February 5.
Gasoline is simply a byproduct of crude oil. Approximately two barrels of gasoline are produced for every three barrels of crude oil that is refined. RBOB is a wholesale blendstock that is non-oxygenated that includes a 10 percent addition of ethanol.
What is the best way to take advantage of the seasonal opportunity in this market? Strategies will vary depending on your account size and risk tolerance. There are numerous ways to position yourself in this market to take advantage of the seasonal price changes.
If you are interested in defining your risk, I would recommend buying calls. If you are sensitive to cost, you can position yourself in a bull-call spread.
A bull-call spread is established by purchasing a call option and simultaneously selling (writing) a call option at a higher strike price on the same commodity with the same expiration month.
Bull call spreads help offset the cost of buying the calls by collecting premium for the call you sell. Your maximum risk in this kind of a position would be limited to the cost you paid for the spread.
I would recommend buying the August $2.80/$3.00 call spread for approximately 3 ½ cents with the hopes of capturing a 20 cent maximum profit. This would define your risk to the 3 ½ cent premium, which comes out to about $1,470, not including commissions. Your maximum profit would be $8,400, minus the cost of the option and commissions.
Another idea would be to buy RBOB futures and sell heating oil futures. Traditionally, as the season changes going into the summer, heating oil will go down in price and RBOB will go up. I believe RBOB futures will exceed $3 by mid-summer.
As the markets constantly change, so do these trading levels. For more current numbers, please feel free to contact me at 866-631-6216 or by email at mcholly@lind-waldock.com.
Marc Cholly is a Senior Market Strategist with Lind Plus. He can be reached at 866-631-6216 or via email at mcholly@lind-waldock.com.
Seasonal tendencies are a composite of some of the most consistent commodity futures seasonals that have occurred in the past several years. There are usually underlying, fundamental circumstances that occur annually that tend to cause the futures markets to react in similar directional manner during a certain calendar year. Even if a seasonal tendency occurs in the future, it may not result in a profitable transaction as fees and the timing of the entry and liquidation may have an impact on the results. No representation is being made that any account has in the past, or will in the future achieve profits using these recommendations. No representation is being made that price patterns will recur in the future.
Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.
*No representation is being made regarding the actual or hypothetical performance of the systems at any other brokerage firm or prior to the dates reflected above. These numbers include commissions, but not fees. Contrary to most published results, please note that these monthly returns are calculated based on closed trade profit/loss and do not include changes in open trade equity. Futures trading involves the substantial risk of loss and may not be suitable for all investors. Past performance is not necessarily indicative of future results. All information, including performance and program description, has not been reviewed or verified by Lind-Waldock.
