Picking a OTM option call for 2011?

[dmo]

Quote from teun:

Yes, because USO uses spot (front month) contracts, not forward. But as they have to roll over the futures, in a contango market this is expected to cost money, which should be reflected (negatively) in the (future) share price.

To say it in other words: when the price of spot oil will rise as the current forward curve indicates, the price of USO will stay the same as it is now because the cost of rolling over is exactly the same as the (opposite) effect of the increased spot price.

Makes sense; I guess there has to be some reason you can't just buy the ETF, short a far back month of crude, and watch the $$$ roll in.

Teun - do you know if the expected effect of the contango on the future price of USO is generally agreed upon to a fairly precise extent? Or, since ETFs are still relatively young, is there still a fair amount of uncertainty as to the exact effect?

 

[spindr0]

]You all of course assume, that our current civilisation and all international markets will be still in existence

Yeh, Fear Of Glowing is a good reason not to invest

 

[teun]

Quote from dmo:

Teun - do you know if the expected effect of the contango on the future price of USO is generally agreed upon to a fairly precise extent? Or, since ETFs are still relatively young, is there still a fair amount of uncertainty as to the exact effect?

Google: etf future rollover

http://www.lyxoretf.com.sg/admins/files/lyxoretf/sg/files/332.pdf

The index uses a four day rollover schedule for each commodity beginning on the first business day of the month and ending on the
fourth business day. All liquid calendar months for every commodity are included in this rollover schedule. The rollover methodology assumes a constant dollar investment and rolls a proportionally equal amount of active contract to the deferred month contract at the end of each roll day.

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So it is clear that the value of the ETF stays the same when the next month future is more/less expensive. However, when a big jump is made "intra-month" (price change of the front month future) then the price of the ETF will increase likewise.

 

[nome]

If you must bet with OTM calls buy 2011 LEAPS. Once they get to about 6 months of life remaining take a real hard look at the stock. Decide then if you want to get out or roll it to a farther year. I say 6 months because after that point theta starts really eating away at your option and it becomes more and more risky.

For really cheap stocks I would do what spindr0 says and just buy the stock. For example, there is no sense buying call LEAPS on Citi when it is currently at 3. You would be setting yourself up to fail.