How to make a play on USO (oil)?

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newguy05

Looking for some suggestions on how to make a long term play on the oil (USO) with options. My sentiment as follows.

1) Oil will come down..hard...eventually. Looking at the chart dating back 10 years, in addition to the macro economic + social and political link to oil prices, the current spike is not sustainable in the long term.

2) Not clear on where oil will go short term (within the next 2-4 months). Given all the MM(goldman, morgan etc..) are pushing oil up heavily, and the tendency that a bubble usually will grow bigger than anyone expected before busting.

So what's a good strategy to make a play on oil? I could just buy some leap 2010 puts, but given the fact oil may still go up quite a bit and high vol on those options. Is there a better trade?

I definitly dont want to miss when oil do start to drop though.
 
Look at $DJAGR and GOLD for there recent sell offs examples, let it go thru long term up trend line, wait for bounce, then short it.
 
If you think the price of naked leap puts are too high, consider buying a vertical or calendar spread. If you expect a really big move down over the next several months, buying far otm put verticals will cost you less, still give a potentially large return for your investment, and has less vega exposure as well. Also consider adding your position on in pieces rather than all at once.
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My sentiment is the same, and its a tough decision to make. The 'I am right' trade is likely best played just by getting short USO in low leverage and sticking out even a 30%-40% drawdown, leaving it alone and checking back in 2-3 years.

The leaps could work.
What you could do in the meanwhile is go long leap puts and sell a tad further out of the money puts in the front months. ie buy ATM 110 USO puts 2 years out, then sell the puts every month 15% out... Roll the calendar to pay for delta and volatility. Who knows, it might fall in a measured pace or a collapse.
 
i think you guys are right, that might be the best play.

buy a leap atm or even 5pt itm put. Then sell the monthly otm puts. If oil continues to gap up, i will make some loss back from the front month puts. If oil gaps down heavily, i make the spread.

Looking at today's price action, it's pretty weak already, the morning rally faded.

The only uncertain (scary) part is betting against goldman/morgan etc..those guys seems are still trying to push the prices up.

EDIT: heres' a diagonal spread

LONG Jan 2010 109P $21
SHORT JULY 2007 99P $2.6

On 1 contract, my total loss will be ~$1900 if uso gaps to $200 for example. If uso crashes to $50, my max gain will be $1000 plus (any vol increase). As each month rolls by, my cost basis will be reduced by the short leg premium.

Any issues with my analysis?
 
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