Going into today, I was long 1,200 shares of UCO with six covered calls in-the-money at the July $28 strike and six covered calls out-of-the-money at the July $33 strike. UCO has been moving higher since its mid-April low. The ascent has been anything but steady and might have topped out again. Two days ago, the leveraged oil ETF hit resistance at a long trend line of lower highs that went back to early May 2012. I saw it falter when it got to this trend line and started trying to figure out if I should hedge again or let it play out. The downside risk looks like it could be another $5 or so from yesterday’s close. The sound of losing $6,000 (1,200 shares x $5) without trying to hedge at all, didn’t appeal to me. I decided to repeat a variation of the last ratio spread I did on UCO, but this time I’ll keep it through the end of expiration.
While UCO was trading at $29.10, I bought 10 UCO July $29 puts for $1.911 and at the same time sold 10 UCO July $27 puts for $1.138 and sold 10 July $26 puts for $0.873. I sold this collection of 30 contracts for $0.10 per combination and received $84.42 after paying $15.58 in commission. If the trend line of higher lows from the past two major drops holds, support should surface around $25.00. If that plan doesn’t work, I still don’t think UCO will fall below the April low of $24.76.
If UCO is below my lower short strike, I run the risk of being assigned another 1,000 shares. I definitely don’t want that, but could stomach it if it happens since I think UCO will move higher again as it continues to push back and forth through a wide trading range. If UCO finds support above $26, I’ll have a net realized gain of $2,084.42 while I lose more than that from the 1,200 shares I already own. That figure comes from $1,227 I can make from the $29/27 put spread portion of the trade plus $873 from the $26 strike put expiring worthless and then subtracting closing commissions will pull me a little under that mark. $2,084.42 divided by 1,000 shares is $2.08 per share. That’ll be my discount below $26.00 (if assigned at $26.00 after not buying back the $26 strike puts) to make my cost per share on this lot $23.92. UCO bottomed at $23.91 last summer and I don’t think it’ll be any worse this year, assuming the dollar doesn’t get too strong.
I’d rather see UCO pop higher again and sell my current shares at $28.00 and $33.00. I recognize that I’m risking more than I should with a single position. While I don’t think oil is going to plummet, the risk is possible. Ideally, UCO will be above $28.00 in July so I can at least sell 1/2 of my position and then close out this new ratio spread for an additional profit if UCO is below $29.00.