Calling All Short Traders: Crack Spreads are Cracking!

The "crack spread" may not sound like much, but traders who pay attention can make some big money in the refiners.

   

In Oklahoma where I live, with five major oil refineries in the state, including one literally just down the road from me, there’s a lot of talk about the “crack spread.” The phrase refers to the differential between the price of crude oil and petroleum products extracted from it – that is, the profit margin that an oil refinery can expect to make by “cracking” crude oil (breaking its long-chain hydrocarbons into useful shorter-chain petroleum products) – thanks, Wikipedia!

The online encyclopedia goes on to say that with regard to the futures markets, the crack spread is a specific spread trade involving buying and selling contracts in crude oil and one or more derivative products at the same time, usually gasoline and heating oil. Oil refineries may trade a crack spread to hedge the price risk of their operations, while speculators attempt to profit from a change in the oil/gasoline price differential.

We’ve seen the crack spread advancing some 40% just in the past couple weeks and, of course, with any major move, it means there are opportunities to trade. In this case, there are several stocks that are so far extended from their standard deviation that options traders can take advantage of some pullbacks in frothy names.

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Keep in mind that we often have a lag between what happens in the commodity market and then the reaction in the stocks, but traders must act quickly, as the crack spreads reversed from their charge up and saw the sharpest drop in all of 2013 Monday. This means time is running out to get positioned, but we could be looking at some pretty strong powerful bearish declines if everything continues on its current trajectory.

I’ve recommended that my Parabolic Options traders get positioned in puts in these four big names set to slide: Phillips 66 (NYSE:PSX), Holly Frontier (NYSE:HFC), Marathon Petroleum (NYSE:MPC) and Western Refining (NYSE:WNR). Self directed traders can short the stocks at current levels, or join us at Parabolic Options to get in on the latest options trades in these names.

InvestorPlace advisor John Lansing tracks the charts all day and offers expert technical analysis in his day trading, options and trading services: Power Trading at the Open, Parabolic Options and Trending123.  For more information on which service is for you click here.


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