As you may have noticed, the price of oil has dropped recently. If you don’t follow oil in the business section or listen to CNBC, at least you’ve seen the price of gasoline come down. Has it bottomed out? I don’t know. I just look at the chart and stare –
I see that after it bottoms, it tends to bounce back. I also see that in the last five years, the oil ETF, ticker symbol USO, has been over $31.66 95% of the time. I’ll tell you why that’s important in a minute. I looked to see what option trade made sense given the way USO has always snapped back over $30, and decided that the spread between $30 and $35 was worth a look.
The spread would cost me $1.66. Even though I tried for $1.60, it didn’t fill, so I bumped to $1.66 and it filled fast. To be clear, I bought 10 contracts of the $30 strike call and sold 10 contracts of the $35 call for a total cost to me of $1660. If USO trades above $35 at the close in January of ’17, this will close at $5000 less commission. A 3 to 1 return. A bet, not an investment. A bet that this ETF will rise just 25% in 2 years to give me back a 200% gain. The $31.66 is where I break even, that’s why I looked at how long it traded above that level. If oil shoots up, and USO trades above, say, $50, in a year’s time, the spread will widen enough that I’d get most of that $5000 out and close the deal early. $4700 in a year would be fine by me.
Disclaimer – this is a high risk trade, a Vegas-style bet that offers a 3 to 1 return, but you can lose the entire bet. This type of options trade multiplies a small move in a stock or index on the downside as well as the upside. This is for information only, and if you enter this trade, you should only do it with your gambling money.
Let me know what you think. Has oil reached a permanently low plateau? Or do you think that’s nonsense just as I do. More important, do you have the patience for bets that last 2 years? I do.