I feel relatively confident that oil’s best days are behind it for the near term, but a few weeks ago, I entered an order to close my UCO put spread for a tiny additional profit. My order lasted for at least two weeks to sell my 20 short puts and 10 long puts for net $0.05. Finally, late last week, I changed the order to just get out for break-even, plus commissions.
Over the weekend, I thought about changing the order. It made more sense to try to buy 10 of my short UCO October $28 puts than to pay commission on the rest and miss any gains I’d make to the downside. Then life got in the way. I figured I’d change the order before the market opened, but I didn’t. Instead, I bought a new car yesterday and had to drive back to the dealership to deliver the title to my old car that I traded in. In all the excitement, I forgot to change my order.
UCO fell about $0.90 at the open or nearly 2.5%, but the order didn’t hit until after 10:00. While UCO was trading at $35.37, about a dime above the low set a minute or two earlier, I bought to close 20 UCO October $28 puts for $0.07 and sold 10 UCO October $30 puts for $0.15. The trade went through for a $0.01 gain for me, but I paid $18.99 in commission, so I ended up paying $8.99 to get out of the position. My original net intake from my July opening order was $291.62. That leaves me with a realized gain of $282.63 on money that I didn’t set aside to pay for any option assignment. Even after exiting UCO, I’m still almost 96% invested. Thanks to this leverage, I made $282.63 with almost nothing backing it. I wouldn’t even know how to figure out a real return on that gain other than using the current $4,787.53 I have available as the denominator. Using that number, which would’ve been different multiple times over the past two months, I made a 5.9% return or approximately 35% annualized.
Knowing how this trade can work, even when it doesn’t work out for me for a bigger gain on a UCO drop, it’s tempting to get back in quickly. However, I think I’m going to back away from UCO for a while. Unless it falls below $30 before the end of the year, I’m planning to stay out of it through December 31. UCO is technically a partnership in a Unit Investment Trust (UIT) and generates a Schedule K-1 tax form, which usually comes late. It just seems easier to be completely out of it at the end of each year (from now on) rather than to try to add and subtract all of the beginning and ending dates of all the options I’ve worked in previous years.
I grabbed this from the USO site. I didn’t see the same for UCO, but the rules of the partnerships are the same.
Q: I didn’t receive any cash distributions on my units. Why are there reportable items on my Schedule K-1 that are subject to tax?
A: No U.S. federal income taxes are paid by USO. Instead, USO files an annual information return and each unit holder is required to report on his/her U.S. federal income tax return his/her allocable share of the income, gain, loss and deduction of USO. USO has not made and does not intend to make any distributions; this means unit holders are required to report their allocable share of income whether the income is distributed or not.
Q: Why do I receive a Schedule K-1 rather than a Form 1099?
A: Since USO is treated as a partnership for U.S. Income Tax purposes, the information is required to be reported on a Schedule K-1 instead of a Form 1099.
Q: If I purchased USO units, what is my tax reporting responsibility for this investment?
A: Please consult a tax professional. Generally, any income, capital gain/loss, expense and other items reported to you on the Schedule K-1 must be included in your tax return.
Q: If I sold USO units, what is my tax reporting responsibility for this transaction?
A: Please consult a tax professional. Generally, your gain/loss on the sale of units must be included in your tax return. The sales schedule reflects sales of your units and includes related adjustments to your tax basis.
Q: How is my tax basis determined for computing gain or loss?
A: Your tax basis is generally the original amount paid for the units adjusted as follows:
– Increased by the allocable share of income and gain reported to you on the Schedule K-1
– Reduced by the allocable share of expense and loss reported to you on the Schedule K-1
I always account for my gains/losses, but don’t know if I’ve done it correctly each year. From now on, I’ll have a fresh start with any UCO positions each year and I expect that’ll make my accounting at tax time easier. If nothing else, I’m going to be more patient with my entries into and exits from UCO. There are plenty of other vehicles that make tax time less complicated. If the reward looks big enough, I’ll take the complication for the gain.