Short puts on USO

(edited)

I currently hold 1,000 short puts on USO, 500 contracts @ $13.00 strike,  expiring Jan. 18 2019, collected $22,500 in premium. break even $12.55, also hold 500 contracts @13.00 strike expiring Jan 17, 2020 collected $65,000 in premium.$11.70 break even. While there is not an exact match up between WTI price and USO it is pretty close, there is only 2 possible outcomes to short put selling, they expire worthless to the buyer ( I am the seller) I keep all premium's received, OR they could be PUT to me and my account will be required to pay buyer the strike price of $13.00 per share and I retain all premiums credited to my account. Either way I don;t wind up with nothing, I either get the USO stock at a discount PLUS the premium or just the premium and no stock assignment (preferred outcome). I would like the opinion of you more experienced trader;s what you think about the safety of these positions and perhaps the overall strategy I am using. These positions are naked, but I am not over-positioned.

Edited by Doyle Johnson

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Hello, The CI is at a five year low for Natural Gas . The myth we are told is we have ABUNDENT NAT GAS, which is True but we also have at the same time a Big Demand from Power Stations which have switched from Coal to Nat Gas ( for Co-Generation) and now lately we are exporting more and more  of  LNG

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14 hours ago, Doyle Johnson said:

I currently hold 1,000 short puts on USO, 500 contracts @ $13.00 strike,  expiring Jan. 18 2019, collected $22,500 in premium. break even $12.55, also hold 500 contracts @13.00 strike expiring Jan 17, 2020 collected $65,000 in premium.$11.70 break even. While there is not an exact match up between WTI price and USO it is pretty close, there is only 2 possible outcomes to short put selling, they expire worthless to the buyer ( I am the seller) I keep all premium's received, OR they could be PUT to me and my account will be required to pay buyer the strike price of $13.00 per share and I retain all premiums credited to my account. Either way I don;t wind up with nothing, I either get the USO stock at a discount PLUS the premium or just the premium and no stock assignment (preferred outcome). I would like the opinion of you more experienced trader;s what you think about the safety of these positions and perhaps the overall strategy I am using. These positions are naked, but I am not over-positioned.

You said that either way you "don't wind up with nothing," but the way I look at it is this: 500 contracts x 100 shares per contract x $13 per share = $650,000.  And you have two of these.  This means your worst-case scenario could be that USO goes to $0 (almost impossible for an ETF, but it is still the worst-case scenario), and that means you earned $65,000 + $22,500 = $87,500 in order to pay someone $1,300,000 to get 100,000 shares of something worth $0.  You must have a really nice paying job if you can afford to lose $1,300,000 - $87,500 = $1,212,500 on only two trades.

Although, the likelihood of USO going to $0 is about zero, so your loss is very likely to be less than this.  On the other hand, your maximum gain can only ever be $87,500, and it can never be more than that.  So, the question is: are you willing to give up $1,212,500 in order to gain $87,500??? 

Maybe you are.  

Options trading is a zero-sum game, which means that for every $1 you win, someone else lost $1.  There is no difference between options trading and gambling on the big game (which up until recently was illegal due to the inherent risks that most novice and even professional gamblers often fail to account for).  The only difference between the two is that options trading makes it easy to protect a very large stock position (in that sense, it functions like an insurance contract).  When not used as insurance (and you are not using it as insurance since your positions are naked), then any time you trade you are making the claim that you think you know so much about the industry or that you have some competitive advantage over your opponents that you have some highly valuable edge in this zero-sum game.  So my question to you is what exactly is your edge?  Do you know the oil market so well that you can predict oil price movements better than half of the professional traders?  If not, then you are playing a dangerous game.  

The overall strategy you are using can be good if you are 1.) lucky or 2.) very good at what you do.  However, due to the high leverage inherent in options trading, as well as the competitive risks involved in zero-sum games, I would argue that there are a lot safer ways to make money.  However, since $1.2 million doesn't seem like a lot of money to you, then by all means, have fun.  My only advice to you is this: never reinvest your options earnings into more options.  That strategy is 100% guaranteed by the laws of math to result in a 100% loss in the long run.  Instead, take your earnings from options and put them into a diversified stock position. 

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Very interesting discussion.  Points discussed here can be useful for many people, myself included.  Thanks for sharing.

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Thank You Epic, for your in depth response to my post. Since USO is an ETF based on the front month of WTI , a commodity, it is very sensitive to fundamental global supply and demand, geo-political events, terrorist attacks etc. Global fundamentals  (are somewhat knowable)  if you stay on top of all incoming data like EIA, API, IEA, OPEC reports, seasonal tendencies. When I sell a long dated Put, it is not my intention to hold to expiry, instead I immediately place a ( buy to close order at about 30% of total premium) and wait for favorable conditions to once again form, selling high IV when premiums are rich and the underlying is in lower support levels has worked well for me since about Feb. of 2016, I do hear what you are saying and I appreciate you input. I do hold JNJ, IBB, FBT,VZ, long term and they have performed OK over the last 5 years( Except VZ ) Basically I am swing trading long dated puts because they are more sensitive to IV and Vega. High IV always returns to mean. The only way crude oil can go to zero is if the Earth stops turning. There is a good chance I will close both of these positions today or maybe some time this week. Thanks again, will post the results when closed. 

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