I bought 100 shares of USO (an oil ETF) at $99.00 and sold a September 98 covered call for $6.80 in my IRA a little more than two weeks ago. I’ve watched the price of oil fall fairly steadily since then. Around the same time I entered a limit order to sell a naked put on the same ETF if/when it dropped further. This morning while USO was trading at $90.54 I sold one USO September 90 naked put (UNAUL) and received $499.25 after commissions.
West Texas Intermediate (WTI) Crude Futures were trading around $112 at the time. Some analysts think WTI could drop as low as $90-100. If that’s the case I’ll be assigned the 100 shares of USO and will sell covered calls on it, hopefully at the same strike while I wait for a rebound. Had I not been sleeping at the wheel I probably would’ve lowered my strike some on this order, but then again I think it’ll be a good long term play and got a good premium for only five weeks out. I’m not saying that oil’s slide is over, but I think the speed of its decent should slow. If it does slow or better yet flatten some, my naked puts should lose value quickly since they are still out of the money and their only value is extrinsic. If USO drops some more I think the risk/reward ratio will shift to being a little more bullish. I’m planning to make this ETF another one of my core plays that I continue to trade for many months to come.
The worst case I can come up with on this trade is that oil continues to fall and I lose on this move at the same time as the majority of my holdings (aside from CHK) find their footing and rally with the reduced energy prices.
It may just be expiration weirdness but today when /CL was down big, equities didn’t really move higher.
You can get the same kind of premiums (slightly better I think) on natgas which I think is a much better trade. Seasonally, natgas bottoms in the summer.
In energy, I think it’s time to long natgas and gasoline. Have no clue about the direction of crude.
What makes you so bullish on it?
I’ll have to write a longer post to do justice to your question. In short, I think we’re seeing big oil companies producing less oil from the same oil fields they’ve been mining for decades. Worldwide demand will continue to inch upwards, with slight pullbacks thrown in like we’re seeing now in the US. I also see another natural disaster or terrorist attack (Nigeria had one recently) that disrupts production and pushes prices higher again.
I still have my natgas play on CHK. I agree with you there on the potential.
Peak Oil + Demand Destruction = Up? Down? Flat?
As the OPEC guy likes to say: “Just as the Stone Age didn’t end because we ran out of stones, the OPEC age doesn’t have to end because we ran out of oil.”
There is real supply contraction in the long term as new fields are more marginal. But there will also be significant inroads made by natgas/solar for transportation/electricity.
I don’t think /CL trades on fundamentals (it’s pretty obvious that the inventory numbers are very suspect).
Will wait for your post while the time decay works on UNG; there’s always the next expiration cycle.
Peak Oil + Demand Destruction = Up? Down? Flat?
I can only hope that my two out of three chances play out for me. Up or flat and I’m good, down and I’m chasing it with calls. It’s somewhat of a hedge for my other positions if nothing else. It’s a new type of trade of me, so we’ll see what I learn.