Playing Oil Short After The Holiday

Jul. 03, 2018 11:03 AM ETUSO, OIL-OLD, UCO, SCO, BNO, DBO, DTO, USL, DNO, OLO-OLD, SZOXF, OLEM, OILK, OILX53 Comments1 Like
Philip Davis profile picture
Philip Davis
66.42K Followers

Summary

  • As is often the case, I believe that oil and gasoline prices are manipulated higher into the holiday.
  • We have a way to play it short with low risk and high reward.
  • A quick rundown of the fundamentals surrounding the trade.

The July 4th holiday is expected to be a huge travel weekend, with 47M people expected to travel for the holidays - 2.1M by plane!

That's the most in 20 years but only really a 1-2% increase over last year yet gasoline (RB) is selling at retail for $2.87 per gallon vs. $2.28 last year, so up over 25% despite there being just as many barrels in storage this week (241.2M) as there were last year (241.0M). This is complete and utter nonsense, and we feel prices have been manipulated higher and will correct after the holidays.

In fact, speaking of manipulation, you can see from the EIA Report last week that 3,088,000 barrels of Refined Products (gasoline) were exported PER DAY last week - effectively stealing 21.6 MILLION barrels from Americans and creating an artificial shortage in this country to drive up prices.

It's too scary to short Gasoline Futures (RB), but we do like shorting Oil Futures (CL) as they test the $75 line (with tight stops above), and we're also using the UltraShort ETF (SCO) to short oil with Sept. $15 calls we bought for the Options Opportunity Portfolio for net $2.10 (we bought back short Sept. $18s we had sold as a spread) and now they are $1.65, so we're going to take the OPPORTUNITY to roll them down to the Sept. $13 calls at $2.75 to put us $2.30 in the money for $1.10 more money. If all goes well and oil moves back below $68.50, this Ultra-ETF should pop 20% to $18+ and we'll collect $5 back on our net $3.75 entries.

As a new, lower-risk trade with options, you can buy, for example, 20 of those calls for $5,500 and sell 20 of the Sept. $15 calls for $1.60 ($3,200) and then you are in for net $1,300 on the $4,000 spread that's actually in the money with oil at $75, so anything below $75 in September can make you $2,700 (207%) - not bad for 80 days work!

Keep in mind, we're using tight stops on our Oil (CL) shorts over $75, so a $200 loss on a 0.20 move against us is our maximum risk while a drop down to $68.50 would be a $7,500 win, so I very much like the risk/reward profile of shorting oil. Unfortunately, there's a lot of cross-talk between OPEC, Iran, Libya, Russia, et al and the prices have been fluctuating wildly, but the overall premise is that demand simply isn't there to support this kind of pricing.

This article was written by

Philip Davis profile picture
66.42K Followers
Philstockworld.com is the fastest growing stock and option newsletter on the Web. "High Finance for Real People - Fun and Profits" is our motto and our Basic and Premium Chat Sessions offer readers a chance to speak to Phil live during the trading day as well as authors like Optrader, Sabrient, Income Trader and Trend Trader - who send out Alerts during the market sessions and discuss trade ideas live with Members. We even have a new low-cost "Trend Watcher" Membership that lets readers view our chat sessions without directly participating a great solution for people who want to test-drive the site and profit from our experience! Trend Watchers get to view all of our Chat Archives, weekly Webinars - as well as the amazing PSW Wiki, which gives you Phil's recent opinions and trade ideas as well as technical and fundamental analysis of hundreds of stocks that we follow. Philip R. Davis is a founder of Phil's Stock World (www.philstockworld.com), a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders. Mr. Davis is a serial entrepreneur, having founded software company Accu-Title, a real estate title insurance software solution, and is also the President of the Delphi Consulting Corp., an M&A consulting firm that helps large and small companies obtain funding and close deals. He was also the founder of Accu-Search, a property data corporation that was sold to DataTrace in 2004 and Personality Plus, a precursor to eHarmony.com. Phil was a former editor of a UMass/Amherst humor magazine and it shows in his writing -- which is filled with colorful commentary along with very specific ideas on stock option purchases (Phil rarely holds actual stocks). Visit: Phil's Stock World (www.philstockworld.com)
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Disclosure: I am/we are long SCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Positions as indicated but subject to RAPIDLY change (currently mainly cash and an otherwise slightly bearish mix of long and short positions - see previous posts for other trade ideas). Positions mentioned here have been previously discussed at www.Philstockworld.com - a Membership site teaching winning stock, options & futures trading, portfolio management skills and income-producing strategies to investors like you.

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