We made some nice gains betting on the rising price of crude oil.
But now is the time to make the opposite bet: the price of crude oil looks due for a decline.
The rise of WTI crude oil to $58 per barrel was helped by the increasingly bullish sentiment for the oil industry. Naturally, rising prices can embolden investors who in turn help drive prices higher.
But when that sentiment reaches an extreme, the feedback loop terminates.
Crude oil speculators have reached an extreme with their bullish bets. At no time in the last 52 weeks have the large speculators’ net long position been as high as it was last week.
This suggests crude oil is capped at least until positioning in the futures market balances out.
The thing is: rebalancing in the futures market tends to come with price adjustments. As you might expect, when the bulls give way to the bears, price gives way too. It’s what’s happens at relative bullish extremes all year. No reason it won’t happen again.
I’m looking for WTI to fall to $52 per barrel initially. After that, depending on the nature of the decline, I might look to a secondary downside target of $49.
To make the most of the coming move, we can use put options on a leveraged ETF: the ProShares Ultra Bloomberg Crude Oil ETF (UCO).
Here’s what I recommend you do today …
|BUY TO OPEN 8 contracts of the January 19, 2018 ProShares Ultra Bloomberg Crude Oil ETF (UCO) put options, with a strike price of $20, symbol UCO180119P00020000, at 1.17 points or better. This order is good-till-canceled.|
If this idea makes sense for you, I recommend you place this order as soon as possible.
NOTE: This bet is directed at the underlying price of crude oil. While oil producers and energy names could follow the price of oil lower, I expect they’ll be more resilient … especially if risk appetite for the broad stock market stays healthy.
I suspect crude oil’s correction will eventually provide a nice buying opportunity for crude oil names.