Mid-afternoon on Friday, I was doing a round of chart reviews for everything in my account and for what I was considering for my account. When I got to my oil position, I didn’t like what I saw in the UCO chart. It had fallen below its 10-day moving average (dma) every day that week and was also below its 20-dma for the last three days. I knew I didn’t want to sell my 600 shares because I think UCO has more upside longer-term, but wanted to reduce my downside risk some.
I thought about selling more calls since the upside potential looked limited, but that could be dangerous in a flash spike in oil. It’s not likely, but possible and I didn’t want to limit my upside for barely any premiums (i.e. not much downside cushion). That’s when logic got the best of me. If selling calls wasn’t worth the premiums, buying puts should be cheap too. So, I entered a limit order to buy six puts and put a floor under my possible losses in case UCO’s decline continued during the next week (now, this week).
While UCO was trading at $31.43, my limit order hit and I bought six UCO February $31 puts for $0.40 each and paid $244.61 including commissions. UCO will have to fall below $30.59 within the next four and half days to make these puts profitable. That might sound like a lot if it was almost any other stock or ETF, but UCO can move more than 2.5% in a day easily. I have an extra three days to get that to happen.
Interestingly, UCO opened lower this morning and I thought I had missed my chance to buy insurance on my shares. I figured the decline had already begun and even thought about chasing it some. Instead, UCO rose more than a dollar from its lows, my order hit and the option prices continued to drop. It looks like I could’ve spent half as much if I had been more patient. I’m not bothered by that. My goal was to put a floor under my losses while UCO looked vulnerable to a “whoosh” lower. I did that. Just as I don’t get upset each month that I don’t have a car accident and my auto insurance comes into play, I’ll be content to see UCO hold support and my long puts expire worthless.
I only went a week out to keep the premiums cheap. I figured that if UCO is going to rollover, it was going to be this week. If it doesn’t drop further this week, I think that’ll mean this is only a consolidation period and the downside is limited. I still might need to buy some puts for March depending on how this week trades. UCO doesn’t typically trade sideways for long before jumping in either direction, but sometimes it does. I expect $25ish to be the low on the downside, but that would be $3,600+ lower for me.
On the bright side, the 50-dma recently moved above the 100-dma. That’s bullish and could be another area of support, just under $30. Also, the gains UCO has today far outweigh the cost of my put purchase. I’m situated nicely this week, I gain on the upside and have support in case of a price drop.