Recommending Two Commodity Trades

The post-holiday trading in the markets brought about not only increased participation and volume but also some fireworks in the commodities sector.

More specifically, we have seen volatility pick up to the downside in growth-sensitive commodities while upside volatility is seen in the safety commodities. While we believe these trends will persist over the longer term, in the short term we see good risk/reward ratios to warrant a trade against the tide.

With this in mind, we have two trades for you today.

First, when you receive this alert, sell to close the United States Oil (USO) July 15 $11.50 puts (USO160715P00011500), which last traded at 47 cents. While we believe the trend is probably lower for oil, we have time decay working against us. We think it would be prudent to capture some extrinsic value at this point and not rely solely on the hopes of intrinsic value at expiry. As I mentioned, we think the trend lower probably will persist, so we will not realize our profit in SCO and let that trade play out since decay is not a factor.

Second, when you receive this alert, buy to open iShares Silver Trust (SLV) Sept. 16 $18.00 puts (SLV160916P00018000) that last traded at 54 cents. We have been seeing a few technical and fundamental factors setting up a move lower in silver. Most notable is the extreme optimism readings in silver futures. In our research, we have noted that after making new highs, reversals have often led to downside follow through over the short term.

On the fundamental side, the skew in SLV has all but flattened out to make puts cheaper relative to calls. This can be a sign of complacency and also many times signals upside exhaustion. Given the negative risk/reward skew and the low realized volume in these options, we think there is a high chance of it becoming a profitable trade.

The recent sell-off has benefited our remaining positions and also is setting up more money-making trading opportunities. We continue to be vigilant and take what the market gives us. While we have been generally unimpressed with the markets, we think upside is in the making and our watch list is reflective of that. Look for more trades to come.