Oil Prices Get Volatile -- Here's How to Play It

NEW YORK (TheStreet) -- Oil is trading higher today, with January futures up 84 cents at $86.72 per barrel. Volatility has come in over the past several sessions, and a period of quiet activity may be coming to an end.

When it comes to oil, these periods don't tend to last long. Oil is clearly being pulled in two directions: the sluggish economy dragging prices lower, with the instability and violence in the Middle East pulling prices up.

Although Israel itself does not directly influence oil prices, any escalation in violence is likely to lead to panic buying in oil. And that could drive a rally.

In addition to the fear premium, it appears oil may be carving out a bottom on the daily chart. The January contract has traded sideways around the $86 level since Oct. 24. Unable to break out to the downside, odds are now starting to favor some upside, especially if Middle East tensions continue to rise and grab headlines.

I certainly would not want to go into the weekend short oil because the geo-political-event risk is too high. In short oil positions, I would recommend getting flat or tightening stops. In short options, spread those positions to limit risk.

For those who agree with me and think we may see some upside in oil, below is a limited-risk option play to try to take advantage from an increase in prices. As always, feel free to contact me to discuss alternative ways of constructing a trade based on your market views. Please note today is Nov. 16, and all trade data is based on the most recent information.

Buy 1 February crude oil 90 call for 300 or better good until canceled.

Risk on trade: Risk is limited to premium paid (300 = $3,000), plus a $45 R/T commission inclusive of all fees.

Profit potential: unlimited.

Notice I have used the February, rather than the January, call option. The February has 62 days until expiration, thus allowing more time for bullish development, and the position will suffer less from time decay than the January. In addition, February futures are trading higher than January at $87.34 as of this writing, putting the call less than $3 out of the money.

Futures and options trading is inherently risky and unsuitable for all investors. Past performance is not necessarily indicative of future results. Stop-loss orders intended to limit losses to certain amounts may not be effective because market conditions may make it impossible to execute such orders.

Commodity Futures Trading Commission disclosure for licensed brokers: This material is conveyed as a solicitation for entering into a derivatives transaction.