71 on shorting oil
 

'71 I read your post on CB. I must admit I'm a little ignorant these days on the specifics on this sort of thing. Did some options for fun back in the day, but it's been a long time.

I have to understand this somewhat for my job so I know a little about oil.

I agree that $100 for oil is awfully darn high. I believe oil majors are using somewhere half or less than that for their assumptions for capital projects. I've heard experts say current supply and demand should equate to an oil price around $50. And that the high price is based on irrational speculation and short term supply issues that change weekly.

So, I like the idea of shorting oil. But being an efficient market guy, I would think the market has accounted for this short term issue so that long term oil puts price oil much lower than $100 and the further you went out, the lower you get.

1. What's the furthest time period out you can put oil?
2. Can you get a price greater than say $50 for anything a year or more out?
3. Where do you go to do this?

I am checking into that . I don't do commodities and never have, so I am totally in the dark there.

There is an ETF that tracks oil. The symbol is USO. One could short that stock, but it would tie up a good chunk of change. You can also buy put options on the ETF, but the premiums look expensive. I only looked at the ones 3 months out. I wouldn't buy those personally.

I got busy taking care of a few clients and didn't really follow up.

I get a feel for when we are near a high and I think we are there. My problem is that feeling can be a year premature. I sold my clients out of Cisco for example in 1999 at $56. They weren't too happy when it kept going up to $72 in 2000. We had bought it at $9, I thought $56 was good enough and the COMP was way over priced at 4200. Of course it went to 5000.

About a year and a half ago I thought housing and real estate was over priced. I am early on this stuff and that is why I mentioned I need to find something I can hold for at least a year for this to work.

How about DUG, an ETF that is ultra short oil? For those unfamiliar, in theory it should go up 2% every time oil goes down 1%. Of course, the inverse is true as well.

Just looked and there is action on USO puts as far out as July. The July 68 puts have some decent open interest and closed at 2.94.

However, doesen't USO track oil company stocks, not the commodity itself? I don't know jack about commodities.

So July 68 meaning oil price of $68 by July? If so, that's what I was talking about. I bet if there were one year puts they'd be as low as $50.

You might be right on the USO. I noted it was tracking oil prices yesterday, but oil stocks might have been down too. I will look today.

I read the profile on yahoo. It appears it attempts to track the oil market itself, not stocks. It mention West Texas Intermediate light crude (WTI) whatever the hell that is. With all the ETF's out there I wonder why they don't have one that tracks crude oil we see quoted on the time in the press.

Thanks

No, the USO is trading at $76.62 this morning. Oil is up $1.98 and USO is up $1.13. So they don't track exactly. One is up 2% and the other is up 1.5%.

The July 68's are at $3.20 on the ask side. If you held the option until expiration, you don't make money until the USO drops below 64.80. or a drop of 13.43%. Using the 1.5 to 2 ration, that would mean crude would have to drop over 18% or to $79 a barrell.

I don't know if this makes any sense. If it is confusing the first time through, it probably will be everytime through and I wouldn't try to figure it out. :)

I stepped up to the line and bought these today at $37.66, wish me luck. If I win, it will be good for the little guys at the pump and Mike W. can share in my happiness.