Taking Profits In The U.S. Oil Fund

On August 28th I wrote about The United States Oil ETF, LP (USO) Contango and how to go about partially offsetting it. Back then USO owned crude at $85 and futures were pricing in $90 a year later in time. At the time of the writing I was bullish on crude and the only way of expressing that via USO options were to January 2013 expiration options.

I had discussed selling January 2013 $25 puts for $2.45 and buying a $34-45 call spread for $3.49. The total cost of the package put together was $1.04.

Right now my suggestion to those who listened to my strategy or are in some type of a similar position would be to take profits without a second look.

So buy back the short $25 puts for $0.50 and book the $1.95 in profits. If you close out the $34-45 call spread you collect $6.05 or a $2.56 net profit. Total net profits of $4.51 against a MVAR of $26.04 for a return of 17.31%. Not stellar considering that crude has rallied 28% but the trade I had recommended was not getting one long crude either until $57 crude or 33% lower in price. So the substantially lower risk trade only lagged the higher risk trade by 11%. I will take that any day especially in a contango based ETF.

The reason I am looking at taking profits in crude is due to both fundamental analysis of economic conditions and the technical charts for crude. I have strong resistance at $115 crude with maximum upside at $135. However, economic conditions do not warrant this price of crude and if we sustain these high prices (or higher) throughout the summer it will start to impact the economic conditions as gas prices pinch the pocket books of consumers.

Without going into nitty gritty details on economics, we are simply not in as strong of an economic situation and there are a ton of potential pitfalls that will not be a pothole in the road but rather a sinkhole. This in tandem with technicals in crude would make me net bearish crude in actuality but since I have been net bullish in crude I am simply electing to take profits at this juncture and enjoy some popcorn from the sidelines.

I will be looking at becoming more of a full fledge bear in crude as we go up higher in prices via risk defined trades in USO. For those who want to remain bullish in crude it would be prudent to perhaps buy puts that lock in your exit to $105 crude equivalent.

For those who are bearish or who want to be bearish I would recommend perhaps buying puts or put spreads at this juncture. Then if we move up in price then you could start entering into bear call spreads and then maybe outright short call positions. But I have no plans on being short calls until crude is above $130.

Of course the one hiccup that could be a thorn in a bear's bottom would be global turmoil that starts to reach boiling points versus the current simmering. However, I do not personally like relying on a trade thesis that counts on one individuals delusions in provoking war with the US even if that event were likely.

Disclosure: I am long USO.