With oil hitting fresh highs and Brent crude topping $80 per barrel for the first time since 2014, there’s a lot more coverage around the black gold than usual.
Adding to that coverage is the fact that Iran and Venezuela are having sanctions placed against them, and this is causing traders to believe there will be a shortage in supply in the next few months, thus causing oil prices to rise.
By using options we can set up two different trades around the increased interest in oil and profit if it goes up or down, with very limited capital allocated.
In fact, these trades require so little capital that anyone could put on these two-legged trades, regardless of account size. Want to take on more risk to make more money? Just increase the number of contracts or widen out the difference in the strikes, either method will allow for a larger risk-reward profile.
First, let’s examine a bullish trade setup. USO is the United States Oil Fund, which is the best approximate for trading crude directly versus using CL futures (which is very capital intensive and with extensive leverage can lead to large gains or losses very quickly).
USO is a low-priced ETF. As of the time of this writing, it is at $15.25 per share. By selling the 15.5 Put on Nov. 16 and buying the 14.5 Put, you would take in a credit of $43, and the max risk would be $57.
In order to get a return of $43 on a share price of $15.25, you would have to buy a significant amount of shares and tie up a large amount of capital. In our example here, the total margin required for the trade is the max risk of $57, which is why anyone could trade this in any size account.
The breakeven point on the trade is $15.07, which is a little over 1 percent below the current price.
Let’s flip the trade and look at a bearish setup. By selling the 15 Call in the same cycle and buying the 16 Call, you would take in a credit of $43 — like the bullish trade above. The max risk would be the same at $57, but the breakeven would be any value below $15.43.
You could buy one share outright, or maybe even three or 300, but with either of these trades, the breakeven is beyond the current price and these options are all out of the money.
That’s why these are considered high-probability trades. If you were to buy the shares outright and the price went to $15.07 which is the breakeven on the bullish trade example above, you would be down 18 cents per share and most likely in order to make the trade worthwhile you bought quite a few more shares than just one …
Oil Trade Ideas Recap
Expiration: Nov. 16, 2018
Bullish Strikes: Sell 15.5 Put, Buy 14.5 Put
Bearish Strikes: Sell 15 Call, Buy 16 Call
Trade Price: $43 Credit (either trade)
Total Risk: $57 (either trade)
Breakeven Points: $15.08 for Bullish Trade, $15.43 for Bearish Trade