The dog days of summer may have you seeking the cool respite of air conditioning, but traders are welcoming the temperature rise in the heating oil ring.

Last week, October heating jumped 4.3%, tipping crack spreads in favor of the middle distillate. This summer, heating oil prices have climbed faster than gasoline: a 40-cent rise since mid-July versus gasoline's 26-cent increase.

Crack Spreads (1:1)

And, if heating oil's normal seasonality plays out, there's still a month of price increases likely. Beyond that, crack spreads are likely to favor heating oil through the winter. Already, the 2-1-1 crack - equal yields of heating oil and gasoline from crude oil inputs - has moved to a premium over the gasoline-rich 3-2-1 crack that reaps more gasoline. Keep in mind, too, that heavier Brent crude has been trading at a premium to West Texas Intermediate for three weeks.

Technical traders are looking at recent bottoming action in heating oil as a "cup and handle" formation that has the potential to break from current levels, around $1.95 a gallon, to the $2.64-$2.70 range. That move would retrace half of heating oil's mid-2008 price plunge.

NYMEX Heating Oil (Oct. '09)

That said, two likely approaches will be considered: outrights and spreads. Outright futures are for short-term traders. With an initial performance bond of about $9,000, an outright trader might be looking for a 325% return on margin on a breakout to the upside before the October contract goes off the board next month.

Securities traders can tag along with a non-margined position in the United States Heating Oil Fund (NYSE Arca: UHN), an exchange-traded portfolio that tracks heating oil futures. Presently, UHN trades at around $17 a share. If heating oil futures retrace to their November 2008 highs, UHN should be dragged to the $34 level.

Traders with less risk tolerance or longer time horizons could spread gasoline futures against heating oil contracts. Using January contracts, the minimum margin requirement would only be $700 for a position that would be held for the bulk of the season.

October heating oil now commands a 4-cent-a-gallon premium over gasoline. Historically, premiums double by the first of December. That has the potential to produce a 240% return on margin for a spreader.