It’s not that oil looks like it is going to shoot all that much higher from here, but maybe more that I don’t think it’s going to tank to ridiculously low levels. My current oil exposure is all in UCO and includes 300 shares long, plus a December 32 naked put and three January 40 covered calls. After UCO climbed up to almost $45 I started to wonder if I’d lose money on my calls. It’s rally was short and we saw a solid sell off, but today’s bounce made me pull the trigger on some additional naked puts to see if I can gain a full profit on one leg of the wide option strangle.
While UCO was trading at $40.03 I sold three UCO January 35 naked puts for $2.70 each and received $808.72 after commissions. This was a higher strike than I originally planned to sell new puts on, but UCO is higher than I thought it would climb also, so I decided to change plans. Even if oil sells off (and we all know it will again eventually), I don’t think it’ll fall too far below my cost per share on this new lot of $32.31. My average cost per share if assigned another 300 shares at $35.00 would be $34.29. That’s a price I can easily play with and be patient with.
The way oil is trading lately it seems my 300 shares stand a good change to be called away in January and I’ll just have to settle with taking my profit and starting over. I have a lot of time value left in the options to melt away in the next couple of months and would love to see UCO slide back into its sideways trading range between $34 and $41. If it does that, I’ll be able to continue repeating this same trade until it doesn’t work. Thanks to the volatility in oil and doubly in UCO I stand to make a return of 8.3% or 49.3% annualized on this trade. Just as easily I could take a loss, but I like my odds over time. The time value in both legs of my UCO options equals nearly $2,500. Hopefully I don’t lose much value on my actual shares before the time value erodes.
Hey,
I read your blog regularly, but have never commented. Been trading options in oil and coal. Mostly selling puts or putting on LEAP calendar spreads on companies like HAL, NOG, CNX. Market sucks, keeps drifting down. Premiums are nice, but do you think it’s premature to take such a bearish stance? (granted, selling only front month options, so using theta in my favor) The market hasn’t washed out yet, and really didn’t this summer; I never got the feeling of true capitulation. Hit me up with a response.
Happy Thanksgiving,
Matt
Matt,
Thanks for your input. I’m not as bearish as you, but I can’t claim to be much of a bull right now either. I took the 10/4 low as capitulation. It caught me out on the wrong side, was sharply lower for days in a row and snapped back in the same day as it hit a new intraday low. We aren’t too far from the closing low in October, ~5% or so. That’s not a ton of downside room which makes it hard for me to want to sell much more here.