USO Synthetic Covered Write (Diagonal)

Click here to view chart/PL diagram.
Factors under consideration
– USO has been between the 36.5-42 range over the course of this year.
– Implied volatility is very low compared to the historical range.
– Possibly looking for some appreciation in the underlying.
– Wouldn’t mind owning USO for the long term
Looking to generate some monthly income off  via a synthetic covered write.
Long July 33 calls (around 80 delta) – as a stock surrogate
Short May 40 calls
Cost = 5.69
* If USO appreciates, then the spread can be closed out for a profit or short call rolled forward one month i.e. sell a June call.
* If nothing happens, then the short call would expire worthless & one can further reduce the cost of the spread by selling the next month call.
* If USO drops, then spread can be closed out for a loss or  an adjustment made e.g. roll down sell the long call & buy a lower priced call, against which one can initiate a covered write position.  The original call sold would decrease in value or expire worthless, depending on when one is looking to make the adjustment.
This is a +ve delta & theta trade i.e. gains with an increase in price of the underlying and passage of time.  The trade will also become +ve Vega i.e. will gain with an increase in IV.

This entry was posted in Commodities, Covered Write, Diagonal, ETF, Options, USO. Bookmark the permalink.

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