Will everyone please take a look at the chart below for the United States Oil Fund ETF (USO) and tell me if you don’t see a downtrend? Because if it is not there, I want to rush out and take a profit on my October, 2011 $34 puts, which I bought Monday for $2.14. If you do see the downtrend, then I am going to run my short into the obvious downside targets on the chart below.
The initial objective, what I call the “easy money target”, kicks in at $33 on the (USO), which will take your $34 puts up to $2.75, for a four day profit of 29%. The “swing for the fences target” takes us down to $31.50 in the (USO), equating to about $80 a barrel for West Texas intermediate crude, would punch my puts up to $4.10. That will allow me to emulate Babe Ruth and Lou Gehrig and put a 94% figure up on the scoreboard in trading conditions that are so miserable that there is a waiting line of hedge fund traders waiting to jump off the Golden Gate Bridge.
For those who are in the “swing for the fences camp”, let me urge you on to greatness. The end of the Libyan civil war is likely to bring 1.8 million barrels a day on to the market within 18 months. I happen to know that the western oil majors were not especially happy with the terms the Khadafy regime extracted from them. They were marginally profitable at best, and as we now know, were high risk.
A grateful new regime is likely to have different ideas. Not only will contract terms be more generous, production could be quickly ramped up to 3 million barrels a day, which the country has always been capable of producing. The offshore area in the Gulf of Sidra has huge potential, but has never been tapped. Capital demands for reconstruction, infrastructure, and deferred maintenance are enormous, so the need for new revenues is great. Oh, and if you work 24/7 like I do, you may have failed to notice that the summer driving season is ending, shrinking demand for gasoline. For the rest of us, this could all lead to lower prices.
Oil puts are a nice hedge for the rest of your long positions as well. On those out-of-the-blue days when “RISK OFF” hits, an oil short is a great hedge for your other long positions.
The only way you could lose money here is for the “RISK ON “trade to continue, and for equities to move up in a straight line every day for the foreseeable future. That is something that I am happy to bet against in view of the dire August nonfarm payroll report that came out on Friday. The markets are anything but finished with inflicting new tortures upon us, and September promises to be another volatile month.
By. Mad Hedge Fund Trader