I’m so far underinvested right now that I caught myself looking for anything that I could reason to be a good trade. The risk seems greater in the near-term to me than the option premiums are offering on most index ETFs. That’s keeping me away from selling new puts on my recent standard ETFs. DIS is dropping and my limit order is inching closer to being triggered, but probably won’t hit until next week at the earliest, if it hits at all. QCOM stopped its brief slide and bounced before I made a trade on it. I started considering XLF and maybe a bullish option spread. I still might work something on it before long since I think financials should do well this year. Before long, I was back on UCO watch.
Oil has fallen from a relatively-recent high above $106 a barrel to almost $91 today. I don’t expect it to fall below $85, if it even makes it below $90. To capitalize on the fear from the steep descent this week, I came back to one of my favorite trades, the leveraged WTI fund, UCO. While UCO was trading at $27.70, I sold two UCO July $25 naked puts for $2.05 each and received $410.15, including a $0.15 commission rebate.
It’s possible that times are different this year and UCO could fall even further. The 52-week low is $85.73 for WTI Crude and it went as low as $82.85 during the summer of 2010’s dip. I expect $80-82 to be a solid floor for the commodity. If oil falls to the bottom of my low range, it’ll be about 12.3% below the current price. A decline of this magnitude would drop UCO under $21.00, maybe around $20.85 (it’s not an exact double leverage due to contango). At that point, I’d have a loss of around $400 on my position and would be ready to buy it and hold on for the ride back into the $30s on whatever economic or geopolitical event roars its head again by then.
Depending how tomorrow goes, I might enter another limit order for more UCO puts at a lower strike. The question with oil is not if it will reverse course, but when it will. This notion works in both directions and can be profitable from both sides. I tend to play the upside more than the downside, but might have to change that on the next spike. For this cycle, I won’t stress at all if I end up owning 400 shares of UCO with an average cost per share (including premiums) in the low $20s. The real decision point will be if I sell another six or eight puts after being assigned the first two blocks. Now I’m just getting ahead of myself.
UCO Naked Put Risk/Reward Breakdown
- Potential profit: $410.15
- Potential return: 8.94%, 17.0% annualized
- Breakeven price: $22.95
- Downside protection: 17.89%
- Recent high: $40.02 on 08/28/13
- Cushion from recent high: 42.66%
- Expected support: $27.50, which almost came into play today. If this breaks, $26.80 and then $25.00 are possible areas of support.
- Position close goal/limit: I’ll take an assignment on these 200 shares if UCO drops enough. The question will be if I add more puts on further weakness. I’ll have to see a true fundamental change before I believe that oil won’t rebound this year. This mindset could put me in a position to double my exposure by the end of January.
I just realized that this is the first opening trade I’ve made since December 10. No wonder I’m so underinvested.