Sold March UCO Naked Puts

I was called out of my long running UCO position last week and hesitated to get back in too soon because UCO has weakened recently.  In fact, the ETF has lost more than 10% from its intraday high just two weeks ago.  That volatility can scare off many investors, but for me, it’s why I keep coming back to it with options and why I continue to profit on it each year.  This leveraged oil ETF is not for the faint of heart to say the least.  Seeing 10-20% moves within a month are not just possible, such moves are expected.

While UCO was trading at $40.71 I sold three UCO March $37 naked puts for $2.00 each and received $599.01 after commissions.  If assigned, which I’m half expecting to be, my cost per share will be $35.00.  That’s 14.01% below the price when I made the trade.  More importantly, it’s almost dead on the midpoint for the ETF over the past six months and $1.00 below the intraday low from the past two and a half months.  I expect support to surface before I take a loss.

This is a half position for me on UCO at a total cost if assigned of $10,500.  I’m willing to go up to 20% of my account in UCO and maybe more if the price goes low enough.  I didn’t need to go for a full position yet.  As I mentioned, UCO has looked weak lately – not enough to keep me out of it, but skittish enough to make me somewhat careful.  If the trade works out for me I’ll make 5.69% or 38.47% annualized. With potential gains like that I have no need to overextend myself.  I almost went with a lower strike to make it a safer trade, but with only 300 shares at risk I think my downside risk is limited.  If assigned, I’ll run the same pattern I’ve done for a while – accept the assignment, sell new covered calls out of the money with new naked puts out of the money.  If possible I’ll try to make money on the shares themselves, but with such great premiums I’ll be happy to break even on the shares cost while I continue to rake in the premiums at a lower price.

The biggest risk to this trade is that the dollar strengthens faster than demand can keep the price of oil afloat.  That happened briefly last year as the fears of what would happen in Iraq diminished.  Oil nose dived, but then it came back and all was fine in UCO-land.  Iraq is back in the picture again recently and its impact will come and go for years to come in my view.  I’m discounting that and still believe this trade’s risks are worth its potential return.

I’m still very under-invested elsewhere.  As I mentioned in my S&P 500 chart this past weekend, the upside looked limited.  SPX is nearing potential support now that it has stepped lower.  If support surfaces I’m going to have to hustle to get some exposure back in place.  I’ll probably start adding more index ETF puts tomorrow, just to make sure I have more skin in the game albeit with out-of-the-money puts maybe.  Small caps found support on IWM’s 10 day moving average and a trend line of higher lows.  I want to see how that opens tomorrow before I really go after it.