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How Should I Hedge This ETF Option?

Posted by Pete Stolcers on January 19, 2009

Option Trading Question

I have some USO calls of Feb 30. I need to hedge this position since the underlying stock price will be going down for some time, because of lower crude oil prices. I am thinking of one of the follwoing strategy: sell higher stike price calls for net credit, sell lower stike price for net debit, buy a put at higher strike price. Can you please comment?

Option Trading Answer

Don’t complicate the problem. If you think the USO is going down - get out of your call options.

All of the other positions range from turning your bias less bullish (debit spread) to an outright bearish bias (credit spread). When you are contemplating a range of strategies like this, listen to yourself. You don’t have a read on the underlying.

I think the USO is basing. The down trend was broken and the ETF showed signs of life. During the recent market decline, the USO did not participate to the same degree and it was forming support above the prior low. 

Contingent on the USO closing below 29, get out of the calls. Otherwise, give it another week or two to get going and scale out of you Feb calls on the way up.
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