Trade Alert – (USO) October 23, 2012

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price.

Trade Alert - (USO)

Sell the United States Oil Fund (USO) December $32.50-$35 bear put spread at $1.75 or best

Closing Trade


expiration date: 12-21-2012

Portfolio weighting: 5%

($5,000/100/$1.75) = 49 Contracts

Oil blasted through my initial downside target of $88/barrel, then $87 and $86, and is now trading at $85 and change as I write this. The (USO) also sailed through our lower $32.50 strike the $31 handle, approaching multi month support.

So I am going to take profits here on my short position in the United States Oil Fund (USO) December $32.50-$35 put spread. We caught the entire $7 drop in Texas Tea since the recent $94 top. Take the money and run.

This position has done a great job protecting my year, which still stands at 19% as of this morning, despite the big hits we have taken on our long positions in precious metals and stocks. This is why you only invest in out-of-the-money call spreads in these treacherous conditions, and then hedge the downside risk with put spreads. You get to live to learn from your mistakes.

Those years spent driving down washboard dirt roads in West Texas, patrolling Jordanian pipelines in a Land Rover, and flying up and down the Persian Gulf in my private plane, are finally paying off. Unfortunately, I have also had to increase my exercise schedule to work off all those chicken fried steaks. I won’t go into detail on the sheep eyeballs I had to eat in the Middle East.

This hedge worked like a charm, generating a 64% profit on the spread in just 13 days. I will look to put this trade back on in the next substantial oil rally.

Keep in mind that these are ball park prices at best. The best execution can be had by placing your offer for the spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these spread trades can be enormous. Don’t buy the legs individually or you will end up losing much of your profit up front.

To execute this trade:

Sell 49 December, 2012 (USO) $35 puts at………………....….$3.80
Buy to cover short 49 December, 2012 (USO) $32.50 puts at...$2.05
Net Proceeds:………………………………………………..…...$1.75

Profit: $1.75 - $1.07 - $0.68
($0.68 X 100 X 49) = $3,332, or 3.32% for the notional $100,000 model portfolio.

Suddenly, Oil is Not Looking So Hot!