Back in the Market

I had been scared of the market for a while, specifically selling naked options. They had blown up in my face too many times with the realized volatility that we have seen. Recently I have converted everything to a covered call write program on a basked of indexes through etf's.

After a while I couldn't resist playing the options market. I had watched crude fall from ~$140 per barrel down to the mid 30's. I am not well versed in the supply and demand of oil, but it can't go to zero. Plus, with the implied volatility in the market right now, there is a huge premium for options.

I couldn't get involved in the crude futures because of the size (plus I don't want to screw up and have to take delivery of 1,000 barrels of oil somewhere in Texas), so I am using United States Oil, USO, which tracks the price. About two weeks ago I sold 2 Jan 31 put options for $0.65. Unfortunately, they expired in the money. Because of the vol, though, on expiration, I was able to sell deep in the money calls (Jan 25 C) for $5.90, bringing my cost per share to $24.45. Oil may continue to sink lower, but unless USO goes much lower than $20, I will be able to roll down again.