Sold September UCO Strangle

I’ve waited long enough without covering my UCO shares with calls.  When I finally got around to it this morning I decided to add some more downside exposure at the same time with new naked puts to go with the covered calls.  Until today I couldn’t get myself to accept the premiums for the risk (upside and downside) I was going to accept.  I had been eyeing the $8 strike for puts and $12 strike for calls, but while oil was extending yesterday’s losses I decided I could reduce my calls’ strike to $11.  Worst case on the upside is that oil spikes (bringing UCO with it) and I exit my position with a nice profit and start it all over again.

I had to leg into this position (make two different single trades instead of one single strangle order) since my single order for a strangle wasn’t hitting as fast as I wanted it to.  While UCO was trading at $9.59 I sold 10 UCO September 8 naked puts at $0.30 each and received $292.86 after commissions.  A few minutes later, while UCO was trading at $9.62 I sold 10 UCO September 11 covered calls at $0.30 each and received $292.86 after commissions.  Selling the equivalent of a strangle for $600 made me more comfortable than doing either leg by itself and also better than only getting $400 for the 8/12 strangle.

After I spent some time looking at the UCO chart and thinking about what the fundamentals could do to the price of oil I decided $11.00 might be a good ceiling.  $11.60 (including the newest premiums) sounded even better.  Going back to May $11 was support, but when it broke $8 became support.  Following that short lived dip, resistance was met just below $11.00 (funny how that happens).  For the past four days leading up to today $10.50 was been resistance before UCO gave in and didn’t even make it above $10.00 today.

The trading range for UCO has narrowed considerably over the past few months when compared to the prior year plus.  That could be the sign of a coming breakout or just a calming of the commodity as expectations become closer to in sync between the energy bulls and bears.  UCO below $8.08 (my cost per share if I buy 1,000 more at $8.00) will be very attractive.  I know I’ll be tempted to buy more if it got that low, so this forces my hand a little and reduces the chance for an emotional decision based on fear at the time.

On a different note, if you weren’t watching the S&P 500 chart today you might have missed that it failed again at the 200 day moving average which might be a signal of another extended move lower for the index.