Today I penned my
eighteenth guest column for Barron’s,
filling in for Steve
Sears
and the venerable The
Striking Price
options column.  Looking
back, I was surprised to see that this is the eighth year I have been
contributing to Barron’s and while I have generally tilted in the direction of
volatility topics during this period, I always like to keep my thoughts
topical, but with an unusual twist or two.
As Barron’s
prefers to structure trade ideas around ETPs or single stocks, I elected to use
the popular U.S. Oil Fund (USO) ETP as my
underlying, though I also like the idea of call backspreads in oil and gas
exploration and production (XOP) or Russia (RSX), though the
Russia ETP has limited liquidity.  As an
aside, readers of this blog will surely know that the prices of futures-based
ETPs such as USO and VXX,
among others, are strongly influenced by the roll yield
associated with the shape of the futures curve. 
For this reason, USO acts most like West Texas Intermediate crude oil in
the short-term, but over longer periods the price of USO is more strongly
affected by the term
structure
of crude oil futures, similar to the issues
associated with VXX and the VIX.
While the Barron’s
column discusses the rationale for the trade and some of the details
surrounding it, I thought I would post a profit and loss graphic for the USO
April 1×2 10.5/11.5 call backspread here as a companion to the Barron’s
material.
[source(s): 
LivevolPro / CBOE, VIX and More]
I am sure this
particular call backspread trade idea is not for everyone, yet I think it is
important for everyone to internalize backspreads, their P&L chart and some
of the tweaks that can be made.  For
instance, one can dramatically change probabilities and payoffs by modifying
strikes (including making use of in-the-money strikes, for instance) and
expirations, whereas the credit or debit for entering the trade is something
that can be strongly influenced by adjusting the ratios to the likes of 2×3, 4×5,
etc.
Also of note,
readers who are new to backspreads may wish to brush up on bear
call spreads
(and bull put
spreads
) before tackling backspreads, as I like to think of backspreads as
short vertical spreads that are supplemented by the purchase an extra
out-of-the-money option in the time-honored tradition of swinging for the
fences with some of the profits from a spread trade.
As I concluded
in the column, “In the options world, there are very few trades where you can
make money should the underlying shares move sharply in either direction.
Backspreads are intriguing in that they have limited risk, unlimited reward (in
one direction), and can make money if the underlying moves either up or down.”

Related posts:

A full list of my (18) Barron’s contributions:

Disclosure(s): long XOP and short VXX at time of writing; Livevol
and CBOE are advertisers on VIX and More



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