In order to capitalize on continued rising oil prices, I entered into 2 credit spread positions offsetting each other for a net neutral cash outflow. I chose ranges about 10% from current price to expire in August. I used (USO), the oil ETF, which doesn't match the exact oil price, but tracks it accurately in lockstep with a steady ratio.
From a pure investment standpoint, yes, this is market timing. From a personal finance standpoint, this is hedging against continued high oil [gas] prices and in the event I lose money due to a rapid drop in energy prices, at least I will have a lower personal outflow for energy. If I played the opposite way, I would be compounding the pain with double increases. The trend is your friend and I am doubtful we'll see a rapid decline in oil prices given supply/demand dynamics and global political issues developing. Airlines and trucking companies hedge energy prices, why shouldn't consumers and investors?
Specific to USO, when it was trading at 115 yesterday, I bought 2 call contracts of Aug 125s at 3.80 each and sold 2 call contracts of Aug 132s at 2.20 for a net outflow of 1.60 each or 3.20 total. Conversely, I sold 2 put contracts of Aug 104s for 2.90 and bought 2 put contracts of Aug96s for a net inflow of 1.60 each or 3.20 total. The 3.20 in and out balanced each other out and now I have a bull position on oil for free.
Editorial Note: Article updated on 7/6/08.