Trade Alert – (USO) September 21, 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. This is your chance to ‘look over’ John Thomas’ shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen.

Trade Alert – (USO)

Buy the United States Oil Fund (USO) December $32.50-$35 put spread at $1.07 or best

Opening Trade

9-21-2012

expiration date: 12-21-2012

Portfolio weighting: 5%

($5,000/100/$1.07) = 47 Contracts

I received another one of those scratchy cell phone calls from my friend in the West Texas oil patch. You could almost feel the dust coming through the ether. He said that while Ben Bernanke his committed to buying $40 billion a month of mortgage backed securities as part of QE3, he has not promised to buy a single barrel of oil. This is bad for oil.

That means Texas Tea has to take the full brunt of collapsing demand caused by economies in Europe, China, and Japan that are in free fall. There are no bailouts here. On top of that, Saudi Arabia wants to whip some discipline into its fellow OPEC members.

It does this by permitting its own production to surge, dropping prices, and inflicting pain on recalcitrant cartel members, especially Iran. Around $80 a barrel is thought to be a price they would be happy with, some $15 a barrel lower than today’s price.

This week rumors were rife of a “fat finger” trade that drew in high frequency traders and triggered an almost instantaneous $4 plunge in the price of oil. But notice how it has failed to bounce back. This generated chart sell alerts more than you can count. The break of the 50 day moving average on the charts is thought to be particularly significant, reversing an uptrend that has been in place since June.

On top of all this is the never ending threat of a Strategic Petroleum Release by the administration that would cause prices to immediately gap down. It is safe to say that energy is not Obama’s favorite industry. He is essentially sailing “Buy those $100 calls on oil at your peril, because I will render them worthless.” That is what he did will his jawboning campaign in the spring when crude threatened $107. Substantially tougher margin trading requirements for many commodities by the main exchanges quickly followed.

The final argument is that in the wake of QE3, there is a sudden death of “RISK OFF” positions to trade against. Oil is almost one of the only ones out there. So an oil short will partially hedge out downside risk in the substantial “RISK ON” positions we have built up in (GLD), (AAPL), and (GOOG).

The extra turbocharger on this trade is that the hedge fund community is still hugely long oil, betting on an attack on Iran by Israel that never came. As we move into yearend, the pressure on them to dump their losers will be overwhelming. So I am quite happy to buy the United States Oil Fund (USO) December $32.50-$35 put spread at $1.07 or best.

If the USO closes below $32.50 on the December expiration, the value of this spread rises from $1.07 to $2.50, a gain of $1.43, or 133%. That would add (47 X 100 X $1.43) = $6,271, or 6.27% profit for the notional $100,000 portfolio.

Keep in mind that these are ball park prices at best. The best execution can be had by placing your bid 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. If you don’t get filled, then just wait for the next Trade Alert. The will be many fish in the sea. To execute this trade:

Buy 47 December, 2012 (USO) $35 puts at………..….$2.42
Sell short 47 December, 2012 (USO) $32.50 puts at……$1.35
Net Cost:…………………………………………..……$1.07

Suddenly, Oil Is Not Looking So Hot!

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