Stocks & Commodities V. 32:2 (41, 64): Explore Your Options by Tom Gentile

Explore Your Options by Tom Gentile

Drilling for Oil Profits without ending up dry…

Anyone who knows me would say I am a versatile trader. I look mostly at technical patterns, but I also throw in my own mix of fundamentals and sector analysis. On top of that, I’ll listen to what independent analysts on the Street think about a certain stock before I take an option position with what I consider an acceptable risk. At a recent seminar, I received a question from a long-term commodity trader who asked whether I traded options based on seasonal patterns. It’s a simple question, but my answer has several parts.

I love seasonal patterns, especially on commodities. We use these patterns again and again at Optionetics. No one can definitively say why seasonal patterns occur, though there are many opinions. Some say it’s supply & demand issues that happen year after year, some say the patterns are weather related, and others say it’s merely the perception of a pattern that causes the pattern itself. So I turned to my good friend and authority on the subject, Jeff Hirsch. He and his father Yale Hirsch have been studying (and trading) seasonality for decades now, and they publish the annual Commodity Trader’s Almanac and Stock Trader’s Almanac. They know a lot about why seasonal patterns occur. As Jeff Hirsch explains in Stock Trader’s Almanac, a timely pattern to pay attention to at this time of year is in the energy markets: “Crude oil tends to make significant price gains in the summer, only to decline in the fall.” He goes on to say that the bottom of the seasonal cycle tends to be mid-February of each year, with the top coming around summertime. He believes it’s due to the summer demand, and since the markets always lead demand, summer demand for oil and gas creeps into energy prices before spring even starts. This pattern shifts more or less each year due to overall supply & demand and implied volatility, stemming from factors such as production in the Middle East and consumption from countries such as China.