Want to Short Oil? Good Luck!

Mahmud Khaled | AFP | Getty Images

Hundreds of thousands of Egyptian demonstrators gather at the presidential palace during a protest calling for the ouster of President Mohamed Morsi on July 1, 2013 in Cairo.

Call it a crude awakening. Geopolitical risk, a large inventory draw, and anxiety about going home short over a holiday weekend have set up oil for higher prices.

Crude oil futures have seen a tremendous move higher this week, as the momentum that carried oil from last week's bottom on the worries of China's cash crunch has been accompanied by this week's tensions in Egypt. In addition, oil is entering the peak of demand season this week. And on Tuesday, inventory data from the American Petroleum Institute showed a tremendous draw. All in all, traders have been given every reason to buy this market.

(Read More: Oil Rises on US Oil Stock Decline, Egypt)

After the API data, crude was able to test a high as $102.18 on Tuesday night. The market has already begun correcting back below $101. Wednesday's Energy Information Administration data will be released as regularly scheduled, and will be one of the most closely watched inventory numbers in recent weeks.

Support will now be found at $99.98 to $100, and a close below here will show signs of a failure. To maintain this pace of momentum, bulls want to see a retest of $102 on Wednesday, and a close above $101.20.

The bottom line is that we have to understand the mindset of the market right now. Even you think oil has gotten overheated, as a trader, you have to weigh the risk/reward. Traders everywhere thought: "Do I want to go home short oil?" That's what started this rally.

Over the last six months, we tested $98 many times. Short traders placed stops above that resistance line, and we triggered stops last night, which pushed the market higher. And as the saying goes, "Every rally starts with a short cover."

But let's look at the fundamentals here as well. At any given time in the market, there is around $10 dollars of risk premium in the price of oil, and that has gotten slightly elevated. At this point, I don't think we will have a sustained oil price above $100. Look for shorts to come back into the market this Sunday night.

(Read More: What Egypt Means for Crude: Pro Trader)

If you want to play the short side of the market, consider buying August crude oil 98-strike puts for $600. This will allow you to get 11 days of short exposure.

But if the Egyptian situation escalates, and we have a shutdown of the Suez canal (which transports 5 percent of global oil) all bets are off in the short-term.

—Rich Ilczyszyn is founder and CEO of iiTrader. Follow him on Twitter @iiTrader.

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