In my eternal search for volatility to sell, the extreme move down in crude oil futures and related products has not gone unnoticed. Over the last week or so, I've been going through different ways to capitalize on a decline in Crude Oil volatility as the holidays approach, and into the new year. I looked into different possibilities with USO and I couldn't find a trade that worked for me because of the very low price of the USO ETF currently. I have been surfing the CBOE Options Hub lately, and now I have a plan.
My basic thesis is that current implied volatility in the USO is way higher than historical norms, and that volatility will abate in the coming months creating an opportunity to profit from this anticipated decline.
Behold the OVX. In short, his is a volatility index that seeks to track the volatility of the USO ETF. The options on OVX are cash settled, European style options. This is a benefit to me over USO because there is no risk of early assignment if things don't go my way.
My plan is to sell a 32.5/42.5 call credit spread in OVX in the February 2015 expiration cycle. I am shooting for a credit of $2.40. The total risk on this trade would be $7.60, and my break even level at expiration would be at $34.90 in the OVX. I am choosing the February cycle because if I am wrong, I have a whole lot of time to adjust, roll or otherwise manage the capital involved.
Drop comments or questions if you so desire. I will update the progress of this trade and my others as they are filled or closed.
Good Luck!
STT
At 14:14 EST I got filled at $2.15. So total risk is now $7.85 and my expiration break even is 34.65. My strategy with the trade going forward is to let the options expire, and take the full credit at expiration in Feb 2015. If adjustment or rolls are required, I'll post.
ReplyDeleteWith OVX passing the 42.5 level last night, I'm going to initiate a follow on trade to add to my position. The 40/50 call credit spread will go on tonight. If in February, my short calls are still in the money, I'll roll to the next expiration.
ReplyDelete