10 Option Ideas for Before Crude Oil Peaks

As previously posted in my blog about crude oil, I am still anticipating a peak in mid July (around options expiration July 18). Below is a chart showing where crude peaked last year.

Crude is most likely rallying as we enter peak driving season, but I believe the price of crude is mainly reflecting the dollar. If the dollar gets stronger crude will fall, and if the dollar gets weaker crude will rise. As the dollar strengthened on June 15, 2009 crude sold off. This is also during a chaotic time in Iran, and as we know from the past, usually whenever there is tension in the Middle East the price of crude oil rises.

I expect the dollar to get weaker in the coming month, as well as demand for oil to increase as we are entering peak driving season. I will list some stocks/ETFs I think should outperform the market over the next month, and the strategy I am using. I am using the July option expiration as based on last year's peak oil, however if the dollar continues to get weaker I believe crude will continue to rally as well. These strategies require knowledge of options, to learn more about options click here. (All data as of pre-market June 16, 2009)

1. Buy First Solar (FSLR) Sell the July 185 call option. This will give you an immediate downside protection of 6.4%, with a possible return of 9.8%. The options market is factoring in a delta of .53 (53% risk neutral probability of expiring in the money).
2. Buy Exxon Mobil (XOM) sell the July 75 call option. This will give you an immediate downside protection of 1.7%, with a possible return of 4.7%. The options market is factoring in a delta of .357
3. Buy the (XLE) ETF sell the July 53 call option. This will give you an immediate downside protection of 3.1%, with a possible return of 4.9%. The options market is factoring in a delta of .357
4. Buy Sociedad Quimica (SQM) sell the July 40 call option. This will give you an immediate downside protection of 2.5%, with a possible return of 11.1%. The options market is factoring in a delta of .301
5. Buy Frontline (FRO) sell the July 30 call option. This will give you an immediate downside protection of 2.3%, with a possible return of 17.6%. The options market is factoring in a delta of .223
6. Buy Nordic American Tanker (NAT) sell the July 35 call option. This will give you an immediate downside protection of 1.9%, with a possible return of 9.9%. The options market is factoring in a delta of .259
7. Buy United States Oil Fund (USO) ETF sell the July 41 call option. This will give you an immediate downside protection of 2.6%, with a possible return of 9%. The options market is factoring in a delta of .336
8. Buy the (OIH) ETF sell the July 115 call option. This will give you an immediate downside protection of 3.1%, with a possible return of 9%. The options market is factoring in a delta of .361
9. Buy the (UCO) 2X Crude Oil ETF sell the July 15 call option. This will give you an immediate downside protection of 5.1%, with a possible return of 15.4%. The options market is factoring in a delta of .373
10. Buy A-Power Energy Generation Systems (APWR) sell the July 15 call option. This will give you an immediate downside protection of 7.5%, with a possible return of 22.1%. The options market is factoring in a delta of .394

If you are more bullish/bearish you’ll want to adjust the strike price and expiration accordingly. If you’re more bearish write deeper in the money calls, you will not return as much if you get called out, but if you do, and the overall market is down you’ll most likely outperform the market.

Out of these 10 strategies, the strategies which appeal most to me (keep in mind I'm a higher risk investor) are the UCO ETF option strategy and the A-Power Energy July option strategy. This is because the returns for these both are higher than the average of the 10 listed in this strategy, and the current risk neutral probability of expiring above the indicated strike is average.

Disclosure: Long APWR, FRO, SQM, UCO

Comments

[john s. gordon:]

since we seem to be starting from a lower level on this annual cycle of speculation, maybe we won't hit 140 this time, although goldman sachs will do everything in their power to goose it higher.
> jack

Jun 16 08:42 AM

[Mad Hedge F...:]

How about just get out? I couldn’t help but laugh when I saw my old colleague from Morgan Stanley, Stephen Roche, on CNBC today. The current chairman of Morgan Stanley Asia (MS) is bearish on the economy and sees no chance of a “V” shaped recovery, just a very weak one at best. There are no “green shoots”, they’re still underground. “The consumer is toast”, he averred, and he expects consumer spending to plummet from a record 72% of GDP to 67% in five years. Because a massive external deficit has to be funded by foreigners, the outlook for the dollar is “down, down, down.” There won’t be a crash, just a gradual decent, as we have seen for the last 38 years. China isn’t going to bail us out. The US has only 4.5% of the global population, but accounts for $10 trillion of consumer spending. China and India together have 40% of the population, but only spend $2 trillion. This disparity is 50:1. Steve was an early BRIC fan, like me, and since China is so overbought short term, India is his first pick. You want to buy countries that have to build infrastructure and a middle class, and China has already done that. India’s recent election of a more pro business government is the trigger. I aggressively pushed India at the beginning of the year (www.madhedgefundtrader...), and it has doubled since then. The humorous thing about all of this is that Steve has been spouting the same perma bear line for the US for 15 years. The in-house joke at MS was that he was sent to China because his bearish sentiments were scaring the firm’s conservative US institutional investors. Given the performance of the BRIC’s since then, it is Steve having the last laugh.

Jun 16 06:39 PM

[erewhonman:]

Oil is fungible, a world commodity. Doubt that the US summer driving season now drives world oil prices any more. I agree with MadHedger guy. The news is being made elsewhere.

Jun 17 12:04 AM