Marco Hickey's  Instablog

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/ETF's 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)

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).

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

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

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

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

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

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

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

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

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