I mentioned yesterday I was eyeing UCO again since I’m already long 10 puts at the October 12 strike. My driving force behind this whole trade series is that I think oil is probably fairly priced in the $60-80s with the likelihood of a deeper fall fairly remote, especially on a longer term view as the economies across the world improve. If that stays true UCO should stay in the trading range for the year I originally identified around $10-14, give or take a few outside days and I think the $12-14 range is going to be the more predominate range. Once I felt comfortable with this range I decided I could accept the risk of selling new puts, even at a higher strike than my hedge. Worst case I lose a dollar per share while collecting premiums to cushion that fall. The alternative was to wait for UCO to fall to the lower end of its trading channel. That could happen, but if it doesn’t I’d miss a potential good trade with limited downside (love the hedge). If UCO does fall I’ll have the long puts to profit on if I decide to remove them as a hedge. I’ll also be assigned shares then from these new short puts and will just change to taking in premiums from covered calls instead of from puts. I’m selling options either way and am not concerned about which side I’m profiting from as long as I’m profiting.
When I saw the futures were down this morning I raised my limit order above where I started with it yesterday and then within the first two minutes of the markets’ open I lowered it some for a half order. While UCO was trading at $13.63 I sold five May 13 puts (not naked since I’m hedged) at $0.55 each and received $271.43 after commissions. I thought about stopping there for the day as part of my original intention was just to take another dent out of the original cost of the puts I bought and then wait for further declines in oil, but then I started thinking and rationalizing and that’s what caused me to leave some money on the table.
I went back to my original plan to make sure I stuck to what I started. My initial investment was for $1,707.14 to buy the October puts. I took in $492.86 for the April puts that expire today. That had my total potential loss down to $1,214.28. The five puts I sold at $0.55 brought my total potential loss down to $942.85. With five months left to sell new contracts (June, July, August, September, October) I went with simple math, $942.85 divided by 5 = $188.57 I needed to bring in each month to just break even for this series of trades as long as I don’t lose money on the shares in the process. Clearly I didn’t start this process in the hopes of breaking even, but actually turning a profit which helps explain why I moved forward with the second trade so quickly.
Going back to my overall bullish leaning view and belief that oil won’t go too low I decided to bring in more premiums while UCO was dipping. I should’ve entered a higher limit order since I wasn’t in a rush after my first order (that was part of the point of the first order, to take the rushed emotion out of the equation). Instead I only went five cents higher since UCO’s fall paused. While UCO was trading at $13.41 my limit order hit and I sold five more May 13 puts and $0.60 and received $296.43 after commissions. Within an hour of this second trade I saw the same option trade at $0.70 although there’s no telling if my 10 contracts would’ve made it through that group since the ask size has been pretty deep at that point.
This brings my potential loss down to $646.42 if I decided (not that I would) to not sell any more options for this series and I’m not assigned any shares. I could lose $1,000 on the shares since I have one dollar between my short puts and long puts, so I’ll have to make that up too if the shares are assigned. Sticking with my plan, if I can continue to bring in $5-600 in each month in premiums through October I’ll have another $2500-3000 I can collect before this is over. That would end the series with more doubling of my initial investment. The risk remains that oil continues to rise and I won’t chase it much higher, but by raising my strike a dollar this month I reduced that risk a bit.
In other news, I’m watching T into the close too. It’s been straddling my strike at $26.00 all day, so I might get an option assignment and then sell covered calls on Monday. If not covered calls, then new naked puts probably. I’m very happy I only sold one JPM naked put this week since it gave back so much today. I want to see it land and then will probably add another contract before long.