USO/JJ - Nothing wrong with that trade!
Sometimes we forget how easy it is to use the system Craig likes to teach at our seminars, simply buying stocks and selling front month or quarter puts and calls. The returns aren't thrilling but, as you have with USO, they sure are consistent!
With USO at $10.54, the sale of the May $10.50 calls for 0.72 and the $10 puts for $0.50 drops the basis to $9.32/$9.66 so worst case is you have 2x at $9.66 (8.3% off) and your best case is you get called away at $10.50 with a $1.18 profit, which is 12.6%.
Oil is currently $41.50 so 8.3% off would be $38.05 so, essentially, the bet is simply that oil will be higher than $38.05 in May and, if not, we end up owning 2x for $9.66 and then we sell another $1.25 in puts and calls and our basis goes down to (speculating) $8.50/8.75. $8.75 (and that would be 4x, mind you) would be 16.6% off the current price of oil, so $34.61 and that's the real bet - Anything over $34.61 (call it $35) in July is some kind of profit on a 4x position and, meanwhile, if oil holds $40, you're looking at 5% monthly returns.
Since that's the goal of our 5% Portfolio (OOP) and this is a very high-probability play as well as a very valuable lesson in stock and options trading, lets add this trade to the OOP and track it:
- Buy 500 shares of USO at $10.53 ($5,265)
- Sell 5 USO May $10.50 calls for 0.74 ($370)
- Sell 5 USO May $10 puts for 0.48 ($240)
That's net $4,655 and, if all goes well, we'll get called away in May at $10.50 and get $5,250 back for a $595 profit (12.7%) in 59 days.
