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Very Simple Oil Scissors

|Includes: SCO, ProShares Ultra Bloomberg Crude Oil ETF (UCO)

Since crude oil re-hit $70/bbl on June 1, 2009, the spark-lines in charts of the double-short and double-long crude oil ETFs UCO and SCO have crossed each other seven times.

stockcharts.com/charts/performance/perf....

This price volatility in crude oil is a product of our unique market moment, as the battle of the defaltionists v. the inflationists is played out in macro-economic arguments against a backdrop of fickle consumer sentiment and bellicose Middle and Near Eastern foreign policy goals.

Until the signs of inflation appear unambiguously, and FED rate increases will be the undeniable confirmation, and those are months away at best; until Iran decides to join the community of Western nations (never); and until the US consumer starts joyriding and spree-shopping again (2011, maybe), this oil scissors is likely to define the movement of the Dow Jones-UBS Crude Oil Sub-Index, upon which the SCO and UCO are based.

Depending on your taste for contextual and fundamental analysis, it is a very simple unleveraged, non-option, non-futures retail play to enter long positions on both UCO and SCO, in share purchase ratios of say 5 UCO / 4 SCO if you think Iran is serious over the next month, or 5 SCO / 3 UCO if you think US consumers are knitting sweaters to mail to each other for this holiday gift season.

Given the indecisive scissoring movement in these two instruments, the taking of short-term profits on both blades is simply a matter of waiting a week or two for the other blade to cut.

A hypothetical position entered on 8/31 at SCO = $17.38 and UCO = $11.46 would have played out as SCO = $18.43 on 9/4, for a gain of 5.7%, then six days later the UCO blade closed on 9/10 at $12.12, for a gain of 5.5%.

Choosing a method for configuring contingent order-trigger bid prices is a matter of taste, but I like the trended volatility since June 1, since that was the day $70 became the pivot for this whole play.

Since June 1, the maximum deviation from that day's baseline has been 28%/-28% on July 14th. That day was by far the outlier. Since that huge price dip, the deviation has settled into a +/- 5%, pivoting between $65 and $73 bbl.

A position opened on the next ask for UCO where CLX9 = $69.50 would set a contingent sell trigger on a bid of CLX9 = $72.97. A position opened simultaneously on SCO where CLX9 = $69.50 would set a contingent sell trigger on a bid of CLX9 = $66.03. Conservative or risk-appetitive personal bias may, of course, lead to higher or lower triggers, and shifts in market fundamentals may cause the pivot to adjust up or down, as your own analysis may indicate.

Accounting for tracking error in the ETFs, Iranian bellicosity, Israeli self-preservation instinct, US consumer paralysis, and continuing non-resolution to the deflation/inflation debate, both positions are likely to close at gross 4% gains (before brokerage commissions and taxes) within the next four weeks.

In the event of a black swan, or fundamental market shift, the down leg, whichever it is, can be held without realizing any other than opportunity loss indefintely, or, givien sufficient cash reserves, can be dollar-cost averaged toward a chronologically much more likely break-even point at the dips, for a one-blade gain on a two-bladed position, where blade two breaks even on a dollar-cost-averaged basis.

Disclosure: Author is long UCO, waiting for the up-blade of her scissor to re-cross $10.80, as it almost certainly will prior to October 30. Her down-blade on SCO cashed out at the CLX9 trigger of $66 last week, after a wait of four days.

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