It’s been a busy few days in teaserdom, but I think this one edges out most of the others when it comes to the urgent questions we’re getting from readers — Dr. Kent Moors publishes a pricey energy trading newsletter called Energy Inner Circle, and he’s telling potential subscribers that a trade which can make five to ten times your money in sixty days just hit a “green light” — and that now is the best time in seven years to make this trade.
So what is it? We’ll sift through the clues and try to get you some answers. And no, I’m not going to make any promises about your $1,000 turning into $96,365 in two months… but I also won’t charge you $1,950 for the info, all I’ll ask for is a bit of your time as we work through the clues.
Here’s what got everyone antsy:
“After 7 years, the final piece of the puzzle fell into place for a trade that can hand you 5 times your money in the next 60 days…
“In fact, the last time oil prices were as volatile as they are today, this trade turned $10,000 into $300,556, over 30 times your money. And that payoff was triggered by an event that we just saw again for the first time since 2008.
“Now I can’t promise you’ll make 30 times your money this time around. That’s an exceptional case, no doubt. But even a fraction of those profits could change your life.
“Long story short, now is the best time in seven years to enter this trade.
“And it costs next to nothing to get started. You can be in this trade today for as little as $116, but you can go as big as you want.”
So… what is it? A few clues…
“Just to be clear, oil makes this trade possible, but it’s NOT an oil investment.Are you getting our free Daily Update
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“It’s not stocks, bonds, or anything long-term.
“It’s not an investment, period.
“It’s a TRADE. A short-term way to make 9.6 times your money – or more – without buying a drop of oil….
“It works the same whether oil swings up or down. You see, the trade covers both sides. So as long as the price moves, as I believe it will, you can make a killing.
“You never see average investors trading this way, because they don’t know how. But traders at Goldman Sachs, Morgan Stanley and Deutsche Bank do it all the time.”
Sounds interesting, right? Well, if he’s talking about huge returns like this in the space of a couple months then he’s almost certainly talking about options, either equity options or futures options — and since he’s pitching this to ordinary investors, most of whom wouldn’t have the slightest idea how to trade futures options (or any interest in doing so), I’ll be he’s pitching options on one of the many stocks or ETFs that’s driven by oil prices.
Which one? Here are a few more clues:
“Now, one thing you should know is that the trade I’m talking about only works with one specific security. It was issued by a Delaware Limited Partnership in 2006 and is now run by two Berkeley grads out of a small office in Oakland, California.
“The good news is that it is extremely liquid.
“So it’s easy to move in and move out.
“But best of all, it gives you a real chance to turn $10,000 into $96,635 or more in the next 60 days.”
And he reiterates that bit about being a trade you can make both ways…
“To make this kind of money in a REGULAR trade, you’d have to bet on which way crude prices are heading.
“Not THIS one.
“If oil shoots UP it can make you nine times your money… while if the price takes another hit, it can make you five times your money.”
So what’s the investment? Well, the “one specific security” he’s talking about is almost certainly the United States Oil Fund (USO), which is a publicly traded partnership that investors have used to track the short-term movements of the price of oil since it was launched in 2006. And yes, it’s managed by a couple guys who are Berkeley grads, and the company they work for, the General Partner, is United States Commodity Funds, which does indeed have its offices in Oakland (no surprise, then, that they hire finance types and economists from UC Berkeley, which is just a few miles from downtown Oakland).
But that’s neither here nor there — what Moors must be advising here is a trade in short-term options on USO. USO has very liquid options compared to most stocks and ETFs, so it’s fairly easy to make these kinds of trades at decent prices as long as you’re not betting huge amounts of money — and USO is also a terrible long-term investment except at times when oil prices are going relentlessly upward, so it makes sense that you’d consider trading options a couple months out rather than trading the shares themselves.
What makes USO a terrible long-term investment is that their whole reason for being is to buy and own near-term oil futures — but futures are generally priced at a small premium (like options) to the current price, so it would cost you a bit more to buy oil for July delivery than for June delivery right now. That premium, absent a big move in the underlying price of oil at the right time, naturally erodes as the days tick by, so the fund is in the position of constantly buying more expensive futures out a month or two and selling less valuable futures that expire sooner. That’s generally a wealth-destroying proposition for a long-term investment if (and this is a big if) you believe that the price will move both up and down over long periods of time without much predictability.
That’s also why most of the levered ETFs (the 2X and 3X funds you’ll see touted from time to time) fail to hit their benchmarks once you get past a month or two of performance, the cost of the eroding time premium in their futures (the derivatives that they have to use in order to get that levered effect) eats away at the performance even if things go in the direction you’re expecting — they can work for a while, and they usually do react predictably and violently to huge market swings, which is really what most speculators are looking for, but you don’t hold them as a long-term asset unless you want to risk significant disappointment.
But that’s just an aside — it’s pretty clear to me that Moors is expecting some strong move in the price of oil over the next couple months, so how would you profit from that using USO options?
Well, unlike with many options advisories we can’t really guess at his specific recommendation just by checking the volume (number of options recently traded) or the open interest (number of options contracts that exist) for any particular strike price or expiration, since most of the near-term strikes have pretty decent volume and open interst — but you can certainly see that the July 2015 options, expiring on July 17, have much larger open interest and volume than the June or August options. Maybe that’s typical of USO options, I don’t know and haven’t ever looked at them before, or maybe it’s because of Moors’ subscribers.
And since Moors is saying this is a trade that’s worth taking both ways, that sounds like he’s recommending buying both puts and calls on USO in July. That would mean, for those who don’t often trade options, that he’s buying the right to both buy and sell USO at set prices before July 17 — so if the price is lower than the contract price his put will be “in the money” and profitable at expiration, and if the price is higher then his call will be profitable. Both cannot win, but they’re relatively inexpensive (because expected volatility is lower than it was recently) and it’s a way to bet that oil will move by at least 10% or so over the next 70 days. If it does make that move, you have a chance at a profit… if it doesn’t, you might make back some of your trade depending on exactly where prices fall. Unless the shares stay within 50 cents or so of where they are now (about $20.40), in which case you’d lose everything on both trades.
So yes, it’s definitely a speculation, and it’s based on a short-term premise that oil prices will either go up or down substantially between now and July 17 and, as they usually do, bring the USO fund (which owns futures on oil going out two months, constantly rolling forward as months pass by) up with it — so you’re assuming both that oil will rise, and that the futures market and USO will perform as they usually do when oil rises sharply.
Moors’ examples indicate that you would make a $10,000 investment in each leg of these options, and if oil rises to $100 (by before July 17, mind you) that could bring you a return of $114,470 — or, if oil falls to $20, a return of $82,100. That is, obviously, a dramatic return — $20,000 to $114,700 in two months is the stuff dreams (and vacation homes, and Bentleys) are made of.
And he says that “the only way you WON’T get a shot at this kind of money in the next 60 days is if oil barely moves at all.” But that’s not true, really — oil CAN certainly go to $100 or $20 in the next two months, but that would be incredibly extreme, a loss of 60% or a gain of about 60%. We remember oil spikes and crashes, but we don’t remember exactly how long oil takes to make those kinds of dramatic moves — and timing is critical for options. As oil collapsed by 60% or so from its highs of last summer, the most it dropped in any two-month period was something like 20-25%. Still dramatic, but not necessarily $20,000 to $114,700 dramatic.
Why does Moors think a big move in oil is coming soon? I have no idea. He’s a professor and an oil market expert, and (as he’ll tell anyone who will listen) he consults with world governments about energy policies and with large companies about big picture oil stuff. If he can consistently tell where prices will be in two months, though, he’s in the wrong business — that kind of soothsaying acumen is unusual, indeed, and seems to reserved mostly for the “owns his own island” crowd.
So my suspicion is that the reason for him liking this setup now has more to do with the relatively low cost of these trades today versus a few months ago, which means it’s easier to make money on the trade even if you’re not right about oil moving quite that dramatically.
Options prices are based on the amount of movement that people expect in the underlying stock, that movement is often referred to as “volatility.” USO price volatility has come down pretty dramatically since it peaked in February, and you can see that quoted using OVX in many systems — that’s the CBOE/NYMEX WTI Volatility Index, which is just a measure of volatility on this particular oil fund (as opposed to the widely discussed VIX volatility index, which measures volatility of the S&P 500). “Volatility” when it’s cited by the market is really just a measure of how much prices move — if they’re talking about historic volatility, they’re talking about how much stocks move up or down during a given time period… but if they’re talking about future volatility, they’re getting that number by inferring from the premiums that people are willing to pay to buy options.
So, to put it in layman’s terms, the market doesn’t expect huge moves in the price of oil over the next two months (the volatility index for USO is the lowest its been since last November, it went vertical in December, going from $35 to $55 as oil was falling from $68 to $55 or so), so it doesn’t cost as much to bet on the near term move in oil prices as it would have back in January or February. If oil is as placid as the volatility index indicates is likely over the next two months, you lose — if it’s much more exciting, you might very well win.
Guessing on the individual contracts, which is absolutely a guess on my part, I’d say that Moors is probably suggesting that you do what’s called a “strangle” and buy options contracts with the same expiration date but slightly separated strike prices, which would be the standard way to make a bet that an underlying security will move big without having to be right about which direction it moves (a straddle, which is somewhat more conservative but also more expensive, would have you buying both the put and the call at the same strike price). In this case, I’ll guess that he’s telling readers to buy the July $21 call and the July $19 put, though it could be something slightly different from that — at current prices, that would cost you about $147 per paired contract (the call is 84 cents or so, the put is 63 cents, you multiply that by 100 because each options contract covers 100 shares).
(Since he gave the example of starting with as little as $116 in the text of the ad, I have to assume it’s a strangle and not a straddle — an at-the-money $20 straddle would cost almost twice as much as a $19/21 strangle in this case.)
That $147 is your bogey, translated to $1.47 — so you need the stock to either be that far above the call price or that far below the put price to make a profit. If USO is at $22.50 by July 17, you roughly break even (not accounting for commissions here), and if it’s higher the profits add up quickly — if USO is at $30, roughly a 50% move in two months, then your $147 is worth $900 (your option lets you buy at $21 and sell at the current market price, $30, though in practice you would just sell back the option to close it at that same profit, which is much easier than exercising). Likewise, if USO is at $17.50 you’re about to break even on the downside, if it falls substantially more the profit bells start ringing — if oil and USO collapses again and USO goes to $8 (that might be roughly equivalent to where USO should be if oil was to drop to $20, though the USO/Oil price relationship is hard to forecast precisely), then you end up with your $147 going to $1,100.
Those are just some sample prices that I pulled today to give you an idea of what could happen to these options — as with all options, I think the likelihood is probably that USO will remain somewhere between $17.50-$22.50 over the next two months and you’ll lose your money, or that it will be within a dollar of those prices and you’ll lose part of your money but not quite all of it. But the beauty of options is that you can’t lose more than you bet (that $147 per paired contract), and since it’s a strangle you do have two different ways in which you can win on the trade, so if Kent Moors is right about oil moving sharply over the next two months you do have the possibility of substantial gains of up to several hundred percent with an oil price spike or collapse of more than about 10% over those two months.
And yes, while Moors is quite vocal about his excitement for this trade because you can “win both ways,” theres nothing unique about that — you can do a straddle or strangle on any stock or ETF that has options if you think there’s going to be more volatility than what is “priced in” to those options, the argument for this specific trade would have to be that you think the underlying stock (or the USO fund, in this case) is going to move sharply in a short period of time, and the rest of the market disagrees with you so it’s a relatively inexpensive trade to make. This same trade back in January would have been probably roughly twice as expensive, because everyone was reeling from the 50% collapse in oil and panicked that it might go to $20 and the market was pricing in a lot more uncertainty about oil prices than it is now.
Of course, being the person who bets against the prevailing market sentiment is usually the relatively inexpensive trade to make — you’re buying what no one else is all that excited to buy (or what they’re fairly eager to sell).
That’s about all I can tell you in laying out this one, and there’s some guesswork involved on my part so don’t hold me to the performance of these specific investments — but by the clues given by Moors I’m quite certain he’s suggesting a strangle or straddle trade on options on an oil fund, an opportunity that he thinks is presented, at least in part, because of the falling volatility in prices of that fund. And it’s almost certainly USO, since that’s the most liquid one. Beyond that, I’ll leave it to you to discuss and opine — just use our friendly little comment box below… thanks for reading!