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$15,000 Tuesday – Monday’s Bottom Call on Oil and Gasoline Pays Off!

How's that for a good call?

As I told you in yesterday morning's post, we've been pressing our long commodity bets as the Dollar topped out at the 100 mark yesterday morning.  As you can see on the right, our gasoline (/RB) longs made $15,000 this morning and yesterday, my pre-market comment was:

What I can tell you is that, generally, a strong Dollar puts negative pressure on commodities, as well as the indexes so, if the Dollar were to pull back off the 100 line (and a weak retrace takes it to 99 which a strong one will test 98 without breaking the still-bullish uptrend), then that will boost Gold (GLD), Silver (SLV), Oil (USO), Gasoline (UGA) and Natural Gas (UNG) – all of which look like good long-term pokes here at $116.50, $16.35, $9.75, $24.50 and $7.05 respectively.  Of course we have really cool options plays to leverage them but, again, we have to save some things for our Members or it's no fun!

If you missed the post (and you wouldn't if you subscribed) you might have caught me over at the Nasdaq at 10am, where we reiterated our short call on the indexes (and they were still over our lines at the open) as well as our bottom call on Oil (/CL), Gasoline (/RB) and Coffee (/KC).  

We're still a long way from getting even on our Gasoline (UGA) trade, as we entered too early on /RB and need to be over $1.37 to begin netting a profit but we have faith that Thanksgiving weekend (next Thursday) will give us the boost that we're looking for.  Oil (USO) still has to get past the contract rollover on Friday but, after that, we should see some quick upside action.

Meanwhile, those Futures shorts we gave you (also in the morning post) made a $625 per contract profit at Dow (/YM) 18,775, $750 per contract at S&P (/ES) 2,155, $1,600 per contract at Nasdaq (/NQ) 4,680, $800 per contact at Russell (/TF) 1,282 and $500 per contract at Nikkei (/NKD) 17,600 and, best of all, they are almost all playable again this morning back at our shorting lines on another BS, pre-market, no volume run-up. 

You didn't miss the boat on gasoline, which can still be played long at the $1.30 line with tight stops below.  OIl (/CL) will be playable too over the $45 line (with tight stops below) and that will be USO $10 and that way we like USO at the moment is with an options spread we'll be adding to our Options Opportunity Portfolio over at Seeking Alpha as follows:

  • Sell 10 USO July $9.50 puts for $1.40 ($1,400) 
  • Buy 20 USO July $9 calls for $1.95 ($3,900) 
  • Sell 20 USO July $12 calls for $0.55 ($1,100) 

That's going to be net $1,400 on the $6,000 spread that's already $2,000 in the money at $10 so we're not paying any net premium, which is a good start and we'll fully benefit from any run-up in oil over the summer.  At $12 on USO, this spread will make $4,600 (320%) and your worst case is you end up long 1,000 shares of USO at today's price, which is $42 oil – not a bad long-term hedge to own!  

If you want to scale it to play it as a general inflation hedge, figure you spend $1,500 a year per car for gasoline and, if it popped $1 per gallon (30%), it would cost you $750 so, to make $7.50 on this spread, you can sell just 2 puts and buy 4 of the spreads for net $280 and those pay $1,200 for a $920 profit (still 328%) if oil is up 25% ($52.50) in the summer and PRESTO – free gas!  

That's how you use options to hedge.  You can hedge against all sorts of things (see Secret Santa's Inflation Hedges for 2016) to keep your household budget on an even keel.  This is especially useful for people trying to make long-term plans to save for college or retirement.  Knowing you won't get burned by rising costs helps you save more consistently over the long haul.  

Speaking of rising costs, Health Care is exploding again with IBB (discussed in yesterday's interview) heading back to it's highs at $300 and the Biotech ETF (LABU) is coming on strong as well.  We are already in LABU our Member Portfolios (way back at $25) but it's probably going to pop $50 and head on to $60.  Sadly, the March options still aren't trading, so no new plays.  

If you want a more relaxing hedge against rising Health Care costs, Pfizer (PFE) is still a bargain, even after popping back to $32.50.  Of course, at PSW, we never pay retail for a stock anyway and, in this case, we'll skip the $1.20 dividend (3.6%) and simply sell the 2019 $28 puts for $2.50 against the 2019 $25 ($8.10)/$32 ($3.40) bull call spread at $4.70.  That would be net $2.20 on the $7 spread that's 100% in the money to start with a nice, dividend-beating $4.80 (218%) profit if Pfizer simply holds $32 into Jan, 2019.  Ordinary margin on the puts is just $2.80 per contract, so it's very margin-efficient too. 

See how easy it is to make 100% annual return on cash?  America is truly great again (for rich people with margin accounts) - let's enjoy it while it lasts!  


Provided courtesy of Phil's Stock World.

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