I thought UCO would dip a little more than it has, but the lower US dollar opened the door for higher oil prices and I decided to take a nibble. I mentioned in my post yesterday that I would probably sell April 11 puts on UCO, but with the move higher for UCO today I saw an opportunity to take in less exposure and increase my premium intake. While UCO was trading at $12.20 I sold three April 12 naked puts at $0.90 each and received $267.86 after commissions.
My original plan of selling the $11 strike seemed less appealing when I saw the premiums were down to $0.50 each. While a $0.50 gain while risking only $10.50 would be a great return I would have had to sell five contracts at the $11 strike to come within $20 of what I brought in at the $12 strike with only three contracts. I only have $3,330 at risk the way following this path instead of $5,250 as I would have had by selling the lower strike. Of course the probability of taking an option assignment at this level is higher than at the lower strike, but with so little at risk I don’t mind taking an option assignment for 300 shares.
I still think oil will come off some from these levels, but if it doesn’t I wanted to be sure I had a piece of the profit moving higher. My downside has a little cushion and if assigned 300 shares I’ll have no hesitation in writing a strangle – selling lower strike naked puts and higher strike covered calls like I did on NDAQ yesterday. After that, if oil shocks me and runs even lower I’ll probably do the same thing again for a total up to 1,200 shares of UCO. By the time I took ownership of 1,200 shares in a surprise fall in oil prices I think it would be time to go long oil and I would have to think about keeping my shares long with no covered calls or at least calls that were fairly far out of the money. My average cost per share would be fairly low by the time all of this played out too, so what I’m rambling about is that I think this is a low risk trade to start with and it carries a potentially great annualized return.