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The run up in the price of oil seems like a movie that options trading investors have already seen. Crude oil closes above $100 a barrel, the U.S. dollar is declining along with the emerging market equities. It was February 19, 2008 that cash crude oil closed above $100. Now just three years and eleven days later, last Wednesday March 2, 2011, crude oil again crossed back above $100 closing at $102.23. The peak in 2008 came on July 11 at $145.66. In the event we are about to experience a rerun of the 2008 movie, we suggest increasing crude oil and commodity position sizes. We have a few ideas right after some brief strategy comments. Based upon the outlook that crude oil will continue higher as in 2008 and not experience a normal springtime seasonal decline we go right to the source with this first idea.
United States Oil (NYSE: USO) closed Friday at 42.33.
USO gapped open higher on February 22, 2011 and the daily trading ranges expanded on the news from Libya. Using the Parkinson’s range method, we calculate the 10-day Historical Volatility at 27.83 with the Implied Volatility Index Mean at 42.51, for an IV/HV ratio of 1.53. The put-call ratio at .4 is bullish.
Consider this long call spread with a Weekly short put sale.
| B/S | Qty | O/C | U Sym | Exp | Strike | P/C | Price | IV |
| B | 1 | O | USO | Jun | 42 | Call | 3.58 | 37.62 |
| S | 1 | O | USO | Jun | 46 | Call | 2.20 | 39.66 |
| S | 1 | O | USO | Mar 11 | 40 | Put | .26 | 45.49 |
By using a near term expiration put as the put sale we increase the edge and sell time premium, however it will be priced a good bit lower on Monday due to the loss of time premium. Use a close back below 40 as the SU (stop/unwind).
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