Hi, I'm a newbie and I was wondering if anyone could explain how I might use Options to make a simple long term bet on the oil price rising in the next 1 to 3 years. I was thinking of taking a long position on the December 2016 contract at a strike rate of $70 and a premium of $8,900. Do you think this could work or would it be madness? Also, am I right in thinking that the futures oil price would have to rise above $80 for the trade to be in the money? Any advice would be greatly appreciated. Thanks
Long term bet on the oil price
- Thread starter Daniel Kerry
- Start date
Alternative - USO, long the slightly OTM LEAP call which is cheaper if you don't have a big account.
No one have the time machine that can tell you what is the future the oil will be, or else, he will the elite zillionaire.
No one have the time machine that can tell you what is the future the oil will be, or else, he will the elite zillionaire.
Last edited:
how DOES PBR loook.... it was 47.. now in 7's.... if oil rebounds and they get their act together.. should be a multi bagger... ??
i own a lot of quality oil stocks... RDS.... TOT.. XLE.. etc...
they did not fall a lot.... as the drillers.. llike..... RIG and SDRL .which murdered me..
but fortunately.. all in my IRA and not large % ..
so i am thinking of taking all losses in the drillers...and going long with PBR... but its a long horizon like 10 years...
i own a lot of quality oil stocks... RDS.... TOT.. XLE.. etc...
they did not fall a lot.... as the drillers.. llike..... RIG and SDRL .which murdered me..
but fortunately.. all in my IRA and not large % ..
so i am thinking of taking all losses in the drillers...and going long with PBR... but its a long horizon like 10 years...
You do understand the carry on oil right now is insanely expensive right? So when you buy long term oil your ATM is NOT the current price of oil. It's a much higher price. That means your breakevens are much higher. The forward curve on oil right now is insanely expensive.
I agree that you shouldn't buy a contract that requires oil to get to $80 for you to win. You don't want to bet that the oil will get to $80. You can do many things. Examples:
- Buy USO stock. If oil goes from ~45 to ~80, USO should double. Then you can sell short term covered calls to reduce your cost price.
- Buy a long term deep in the money CALL option for USO. It's equivalent to buying stock but requires less money upfront for a small premium. You can also sell covered calls against the long term CALL option. This is known as the "poor man's covered call".
- Sell a PUT option to bet that price of oil will NOT be below a certain value. For instance, if you sell the PUT with strike $60 and the oil price goes above 60, you keep all of the premium received. If it goes only to $50, you still keep the time and volatility premium at expiration. You can also sell short term puts against the long term to do the inverse of the covered call but with puts.
- Buy puts or sell calls on an inverse oil ETF, such as SCO. Since the leverage ETFs have a decay (SCO is -2x the move of oil), betting on this one going down for the long term will put the decay in your favor. Although this is priced-in in the put options and you will pay premium for it when you buy a put.
Since at this moment the IV is very high on the oil stocks, you should consider strategies for selling options rather than buying options at this moment or you will be paying a lot of volatility premium that will disappear at some point and reduce the value of your option even if the price has not moved.
- Buy USO stock. If oil goes from ~45 to ~80, USO should double. Then you can sell short term covered calls to reduce your cost price.
- Buy a long term deep in the money CALL option for USO. It's equivalent to buying stock but requires less money upfront for a small premium. You can also sell covered calls against the long term CALL option. This is known as the "poor man's covered call".
- Sell a PUT option to bet that price of oil will NOT be below a certain value. For instance, if you sell the PUT with strike $60 and the oil price goes above 60, you keep all of the premium received. If it goes only to $50, you still keep the time and volatility premium at expiration. You can also sell short term puts against the long term to do the inverse of the covered call but with puts.
- Buy puts or sell calls on an inverse oil ETF, such as SCO. Since the leverage ETFs have a decay (SCO is -2x the move of oil), betting on this one going down for the long term will put the decay in your favor. Although this is priced-in in the put options and you will pay premium for it when you buy a put.
Since at this moment the IV is very high on the oil stocks, you should consider strategies for selling options rather than buying options at this moment or you will be paying a lot of volatility premium that will disappear at some point and reduce the value of your option even if the price has not moved.