Crude Oil Inventories Are Released Weekly: How To Trade It

Every Wednesday at 10:30 AM, ET, a crude oil inventory report is released, causing movement in the oil market.

Investors must account for three things amid this event: 

• Timing: When do you think the market will move? The market tends to move around the time the report is released.
• Distance: How far do you expect the market will move? There are deviation levels as well as other methods that can help you figure this out.
• Risk and Reward: Have a target goal of 1:1 risk/reward ratio or better. This means for every $20 at risk, you expect the market to move fast enough and far enough to make a potential profit of $20.

Know Your Deviation Levels

The release of the crude inventory report offers the opportunity to use strategies when traders know there will be movement, but don’t know the direction of the move. Both a strangle and a straddle are strategies that can be used in this situation.

When the crude oil inventory report comes out (seen by visiting US Energy Information Administration if readers don't find it on a newswire), there are two scenarios. First, if there is an abundance in the supply, traders would expect the price to drop. If the actual number comes in lower, there would be a drop in supply and one would expect the price to rise.

A strangle is a way to play this uncertainty. If the market goes up or down far enough, it's possible to make a profit on the movement; check deviation levels to see the expectation on distances.

The expected distance of movement changes on a daily basis. Recently, settlement on CL (Crude Oil) was at 38.10 with full +/-1.0 deviation level moves set at 39.28 and 36.92 respectively. Each of these moves represents a move of $1.18 from settlement level.

Seventy percent of the time the market will move up or down one deviation level.

The move can be from -0.5 up to +0.5, which is still considered a full deviation level move. Knowing the potential distance the market may move can help traders when planning ahead; the purple lines shown in the chart below are the plotted deviation levels.

To view a larger image, click HERE.

Setting Up A Trade With Binaries

Binary options are one way to play this, as Nadex explains. Someone buying a binary within the expected move would buy above the market. Say the market was currently at 37.87, knowing that a full deviation is 1.18, a tarder could round slightly and look to buy a strike around 38.85 or 39.00.

Selling a binary carries the inverse logic. Using the same scenario as above with the market currently at 37.87, a strike about 1.00 below the current market level makes sense.

Risk-Reward Bears Monitoring

It's best to keep in mind that a risk/reward of 1:1 or better is preferred. Combine the risk of both binaries together. Using the example above, there was $10 on the bought binary and $10 on the sold binary for a total $20 risk.

Therefore, traders should have an expectation that oil will move far enough to recover their original $20 at risk on one of the legs of the strangle and make a profit of $20 for a risk/reward of 1:1.

In this example, the losing leg would lose $10, so the profitable leg needs to make $30: $10 to cover the losing leg and $20 to make the risk/reward 1:1. Total net profit goal of the profitable leg needs to equal $30.

Of course, this example is simple but provides a good example of how traders use binaries to play just that: a binary event.