Is Oil Close to a Floor?

In a comment yesterday I mentioned that I thought about selling a new naked put on UCO all day, but every time I looked at the chart for the ultra oil ETF it was down another 20 or 30 cents (and that was while I was checking frequently).  I really debated it all the way until the last few minutes of the day, thinking that there was probably some margin covering going on which exacerbated selling.  Some selling was just based on flat-out fear.  Some of it was justified with the latest weekly jobs data spiking unexpectedly and the fact that if the dollar strengthens commodities will be hurt. I decided not to try to catch a falling knife just yet though.

Then along came the April employment report that although the headline unemployment number climbed back up to 9.0%, the number of new jobs added grew more than expected.  Since I’m a long term bull on oil anyway, this news and the flattening of UCO in the first few minutes of today’s trade were enough to get me to add more UCO exposure.  While UCO was trading at $48.13 I sold one UCO July $42 naked put for $2.70 and received $269.53 after commissions.  That brings me up to about half of the amount I’m willing to allocate to UCO.  Before adding any more I’d like to be assigned one or two of my puts so that I can work some option strangles by working new naked puts and covered calls at the same time.  My first lot that has a chance to be assigned will come from my June $54 put.  I have about a dozen possible plans for how I’ll handle that first assignment.  I plan to sell covered calls on my shares, but it’ll depend where UCO is trading at the time as to what strike I use.  I’d like to use a $54 strike so I don’t have to sit out for a month because of the wash rule if those calls are assigned.  I’m getting too far ahead of myself for now though.

Oil could hover in this $100 a barrel range, plus or minus $5 for weeks, but then I think we’ll see a tendency for it to rise again as demand continues to grow while the world’s economies improve, slow as they might.  I don’t think it’ll be flat too many days before it makes a decision on which direction it plans to move.  Just today UCO has moved over more than a $4 range and we have another 90 minutes of trading left as I write this.

For this trade I have an 18% cushion which we saw yesterday can nearly evaporate in a single day, but buying more shares at $42, with a cost under $40, won’t keep me up at night.  It’ll bring down my average cost greatly and I’ll be happy to write new naked puts out of the money in the $30s all day long.  I have a potential annualized return of 34.9% on this trade based on the cash I’d have to find to back it if assigned.

If UCO keeps melting lower, I see $46 as a potential area of support and after that $42 stands a good chance of working too.  The 1 year intraday low of $32.32 last May doesn’t seem too likely as a new target, but it’s always possible.  I can imagine that any moves below $35 will be bought heavily, at least by me most likely.