Ways to trade oil with options?

C

c.chugani

Given the parabolic moves in oil, i find it risky to go long the underlying at these levels.

I was thinking it would be wiser to put on a vertical spread on USO. ie. sell the 110 august puts @ 5.70 & buy the 100 august puts @ 2.44.

But I still don't like the risk / reward ratio on the trade. Furthermore, the profits are capped in the likely scenario that the commodity goes even higher.

Any ideas with option strategies that might help profit from the continuing rising prices while limiting downside risk?

If you find it better to trade options on another vehicle instead of USO, feel free to post your ideas.

Thanking all of you in advance.
 
Quote from c.chugani:

Given the parabolic moves in oil, i find it risky to go long the underlying at these levels.

I was thinking it would be wiser to put on a vertical spread on USO. ie. sell the 110 august puts @ 5.70 & buy the 100 august puts @ 2.44.

But I still don't like the risk / reward ratio on the trade. Furthermore, the profits are capped in the likely scenario that the commodity goes even higher.

Any ideas with option strategies that might help profit from the continuing rising prices while limiting downside risk?

If you find it better to trade options on another vehicle instead of USO, feel free to post your ideas.

Thanking all of you in advance.
More...

In your proposed strategy you would be buying premium at about 47.4% and selling it at about 46%. That's a poor way to put the odds in your favor.

I would look for ways to buy premium cheaper, and sell it higher. Let the skew work in your favor, not against you.
 
Quote from dmo:


I would look for ways to buy premium cheaper, and sell it higher. Let the skew work in your favor, not against you.
More...

Could you please elaborate on how to find cheaper premium? Are you talking about monitoring the bid-ask prices and getting filled in at favourable quotes? Or simply choosing different strikes altogether?

Thanks.
 
Quote from TYtrader:

Ever considered a straddle or strangle? Or are you just bullish?

What about playing natural gas instead? UNG?
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I havent studied the UNG option chain.

On the other hand a strangle on USO seems like a good play, since I get to participate both in the move up as well as a possible correction.

Shall look at different setups.

Thanks for your time.
 
Quote from dmo:

In your proposed strategy you would be buying premium at about 47.4% and selling it at about 46%. That's a poor way to put the odds in your favor.

How did you get those premium percentages?

Cheers.
More...
 
Quote from c.chugani:

Could you please elaborate on how to find cheaper premium? Are you talking about monitoring the bid-ask prices and getting filled in at favourable quotes? Or simply choosing different strikes altogether?

Thanks.
More...

The options of USO actually exhibit a classic "smile" of volatility - somewhat rare these days. The ATM's trade at the lowest IV's, and the OTM puts and calls trade at higher IV's. So if you buy the 100's and sell the 110's, you are buying more expensive volatility, and selling cheaper volatility.

As of 6:00 pm Chicago time, the Aug. 100 puts are at 47.11%, and the Aug. 110 puts are at 45.98%. I got those numbers from the TOS platform.

Please keep in mind that when you buy an option you are BUYING VOLATILITY. When you sell an option you are SELLING VOLATILITY. If you buy volatility high and sell it cheap, you are putting yourself at a disadvantage.

On the call side the smile or "skew" is not as steep, but at least it is in your favor. I see the 114 calls are at 43.08%, and the 126 calls are at 44.03%. If you buy that or a similar call spread you have the statistical wind at your back, rather than having to fight it.
 
Quote from dmo:

The options of USO actually exhibit a classic "smile" of volatility - somewhat rare these days. The ATM's trade at the lowest IV's, and the OTM puts and calls trade at higher IV's. So if you buy the 100's and sell the 110's, you are buying more expensive volatility, and selling cheaper volatility.

As of 6:00 pm Chicago time, the Aug. 100 puts are at 47.11%, and the Aug. 110 puts are at 45.98%. I got those numbers from the TOS platform.

Please keep in mind that when you buy an option you are BUYING VOLATILITY. When you sell an option you are SELLING VOLATILITY. If you buy volatility high and sell it cheap, you are putting yourself at a disadvantage.

On the call side the smile or "skew" is not as steep, but at least it is in your favor. I see the 114 calls are at 43.08%, and the 126 calls are at 44.03%. If you buy that or a similar call spread you have the statistical wind at your back, rather than having to fight it.
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Ok thanks for this helpful post.

I find it funny how the vol smile on USO is rare: you would think that the ATMs should always trade at lower IV's than the OTMs. Basically you are telling me that this situation is reversed nowdays, and that selling ATMs and buying OTMs is the right way to get the odds in your favour... interesting.

One more thing, this percentage you get from TOS represents what (ie. implied vol, extrinsic value, ...)? With what data does the platform calculate it?

Cheers.
 
Quote from c.chugani:

Ok thanks for this helpful post.

I find it funny how the vol smile on USO is rare: you would think that the ATMs should always trade at lower IV's than the OTMs. Basically you are telling me that this situation is reversed nowdays, and that selling ATMs and buying OTMs is the right way to get the odds in your favour... interesting.

On more thing, this percentage you get from TOS represents what (ie. implied vol, extrinsic value, ...)? With what data does the platform calculate it?

Cheers.
More...
The percentages I quoted are implied volatilities - the only meaningful way to express the cheapness or expensiveness of an option.

The normal pattern these days is for the otm puts to be most expensive (in terms of IV), the otm calls to be the least expensive, and the atm's somewhere in the middle. So the "smile" no longer looks like a smile at all in most cases, more like a simple sloped line with the left end higher and the right end lower.
 
Quote from c.chugani:

Ok thanks for this helpful post.

I find it funny how the vol smile on USO is rare: you would think that the ATMs should always trade at lower IV's than the OTMs. Basically you are telling me that this situation is reversed nowdays, and that selling ATMs and buying OTMs is the right way to get the odds in your favour... interesting.

One more thing, this percentage you get from TOS represents what (ie. implied vol, extrinsic value, ...)? With what data does the platform calculate it?

Cheers.
More...

If i,m correct the aug puts
sto 95
bto 90
could be done for about a .63 credit with 4.38 margin. thats a 13.6% return for 46 days.
the 95 put is at 49.04 vol. and the 90 is 49.77 vol .
Is that the skew your seeking
cheeers
john
 
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