The stock market can make you laugh at yourself sometimes. UCO is playing its roll as the comedian today. In my post on Monday I mentioned that I was trying to work a calendar spread on UCO. I couldn’t get the limit order I wanted to work for me on a combined order so I broke it down and legged in with a single purchase and then waited out the sell order for the second leg. With the VIX down option premiums are down. That never lasts forever, so I decided to mix up my usual trading routine and open a calendar spread on UCO for a debit with two expectations. I expect the volatility portion of the option price to go up before my long options expire and I expect oil will come down some from its current levels, maybe for a few round trips before October.
While UCO was trading at $13.03 this morning my limit order hit and I bought to open 10 UCO October 12 puts at $1.70 each and paid $1,707.14 with commissions. Originally I was trying to get my limit order to hit for a $1.15 debit for the combined order, but it only looked like $1.20 would work and I didn’t want to go that high. By the time this first leg of my option spread hit the prices for the second leg had dropped and the best I could get for a market order would be a $1.25 spread. I decided to go with a limit order to target a $1.20 spread. Yes, now I was hoping to get the $1.20 spread I was trying to do better than earlier. UCO was just toying with me and mocking me for not selling the $1.20 spread four days earlier when I had the chance. I let my order sit for an hour and started to consider lowering the price to make sure I didn’t get stuck missing out on reducing my overall cost by as much. The bid/ask was $0.45/0.50 with 177 trades for the day, all at $0.50. Every once in a while a few more would trade and I could see from the market depth that eventually mine would probably hit if UCO stayed flat. I figured I’d wait until at least 3:00 pm before reducing my price.
Just after I stepped away for lunch my second leg hit. Oil took a big step down and my limit hit easily. While UCO was trading at $12.77 I sold to open 10 April 12 puts at $0.50 and received $492.86 after commissions. UCO went down as low as $12.44 within a few minutes before catching its footing again and it looks like I could’ve easily sold these puts for $0.60 if not $0.65 each. I ended up opening the calendar spread for a net $1.20 debit and the piece of mind that UCO didn’t get away from me to the upside.
The most I can lose on this trade is $1,214.28. April options expiration is in five weeks and once these short puts (the April puts) expire I’ll keep rewriting new puts through October if the shares aren’t assigned. If UCO finishes below $12 I’ll either roll the puts out a month or take the option assignment and then start selling covered calls. As long as I’m taking in premiums it doesn’t matter if it’s from calls or puts. Depending on the price of UCO at each expiration I’ll either sell one or two months out. Selling one month out will earn higher total premiums, but by taking smaller bites each month. As long as I keep bringing in an average of $0.20 each month for May through October I’ll break even. I think UCO will stay between $10-14 for most of this year and more than likely will be between $11-13 most of the time. If I’m correct about that I should be able to bring in closer to $0.45 each month if not better. If I bring in $0.45 for six options expiration periods that will be $2,700 (not counting commissions). I stand to more than double what I’m risking and I consider the probability of losing to be very small. If this pans out for me even at half of what I expect, you’ll see a lot more of this type of trade from me in the future.
Oh, I’m still short the original three UCO April 12 naked puts I sold on UCO a few weeks ago. I’m considering those options in a different category since they aren’t part of this trade strategy. If UCO finishes April option expiration below $12, it will become a long position for me and I’ll work it as I need to.
At what point(s) would you exit the positions if it started to move against you?
I don’t plan to exit this one early since I have a hedge in place. If UCO continues to move higher I’ll think about selling new puts at a higher strike to bring in better premiums and work down my total debit. Even if UCO heads higher I doubt it’ll go too high for too long. This position might require a little more patience.