Trading Crude Oil Inventory Reports with Nadex

Every Wednesday, Crude Oil inventory reports are released at 10:30am EST. Quite often, the actual inventory reports greatly misses the forecast projections from the analysts.  When that happens, there can be wild swings in the price of crude oil.

Nadex provides binary options and spreads on crude oil futures. With binary options, you are making a decision about the likely direction of the market from a strike price within a defined time period. In today's trade, the 9am-11am EST time period was selected to coincide with the release of the crude oil report.

Trading the Crude Oil News is a great opportunity to place an out-of-the-money (OTM) trade with Nadex. When you place an OTM trade, you are expecting a large move in the markets to occur, and you are making your trade based on the expected price movement of the market. Since the market is nowhere near the strike price of your trade, it is possible to risk very little for a potentially nice reward.

Today, I placed 3 trades on the Crude Oil news.

The first 2 trades were OTM trades placed 1 minute before the release of the reports. At that time, the market was trading around 61.56. I BOUGHT at 62.26, and I SOLD at 60.66. If the market moved sharply in either direction, one of these trades would win and the other trade would lose. If the market did not move sharply in one direction or the other, then both trades lose. I had a total of $27 maximum risk at stake in these 2 trades.

The last trade was made after the release of the news, trading in the direction of the market.

At 10:30am, the Crude Oil Inventory Reports were released:

Courtesy of Investing.com

The reports showed a drawdown on inventories that missed estimates by 1 million barrels. Normally that would have a bullish impact on Crude Oil prices, but the exact opposite happened. The price of Crude Oil tanked:

Click on Nadex Chart to Enlarge

As soon as the price of oil started plummeting, I exited my BUY order. Instead of losing the full $17.50, I lost $16.00. The market moved to near the 61.06 strike price within 1 minute. That's where I took advantage of the plummeting prices and placed a SELL order, risking $48.00 to make $52.00. The market continued downward and broke through my OTM strike price of $60.66.

Now I had a decision to make. With about 10 minutes left until expiration, do I take $50-$60 in profit on the OTM trade, or should I let the trade expire, hoping that the market stays under 60.66 for a full profit of $90.50? I felt strongly that the 2nd trade was a sure winner that would yield a $52 profit, so I decided to let the OTM trade ride until expiration.
The market continued to dive and expired at 60.485 at 11am. Both of my SELL orders settled for a full profit at expiration. Here are the trade results for this trade:

LOSS:  BUY at 62.66    $16.00 loss, plus $1.80 in exchange fees = $17.80 loss
WIN: SELL at 60.66    $90.50 profit, less $1.80 in exchange fees = $88.70 profit
WIN: SELL at 61.06    $52.00 profit, less $1.80 in exchange fees = $50.20 profit

Total Profit: $121.10

Conclusion

Trading Crude Oil Inventory news can be profitable especially if the actual reports are significantly out of line with analyst's estimates. To take the guesswork out of the news, I like to hedge the news with an OTM trade on both sides of the price of oil in advance of the news. If possible, I don't like to risk more than $15 on each OTM trade. This trade doesn't always work. If the reports are in-line with analyst's estimates, then the price of oil can trade sideways. If that happens, then both OTM trades can lose.

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The Purpose of this Blog

The Inquisitive Trader will be used  to share my experiences as an investor getting back into trading the markets. In June 2014 I joined the staff at TradingPub, and I am responsible for helping to book speakers for free webinars. Each week, I am exposed to a wealth of information from leading industry experts who teach how to trade the financial markets. When I come across interesting trading strategies, I will summarize my thoughts and share a link to the archived webinar. As I develop my own trading plan, I will also share some of my personal successes and failures. Responsible comments are welcome, but to avoid flaming posts and spam, I will be moderating all comments. I hope you find this blog useful, and wish you the very best on your journey trading the markets.

Disclaimer

The opinions expressed in this blog are solely those of the author, and should not be construed as trading advice. I am not a registered or certified financial planner. There is a very high degree of risk involved in trading. Past results are not indicative of future returns. All individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein.