Date
10 December 2016
Oil prices are expected to gain some strength even if an upcoming OPEC meeting doesn't lead to an output cut agreement. Photo: etfdailynews.com
Oil prices are expected to gain some strength even if an upcoming OPEC meeting doesn't lead to an output cut agreement. Photo: etfdailynews.com

Using oil call options as a Trump trade

Very few big names in the investment world predicted Donald Trump’s victory in the US presidential election, and even fewer people believed that a Trump win will do any good to Wall Street.

The list of such people included Berkshire Hathaway chairman Warren Buffett.

The legendary investor was convinced that Trump will be a disaster for the markets, prompting him to throw his weight behind the Democratic nominee Hillary Clinton. 

The outcome of the election came as a shock to Buffett, as it did to many others.

But what was even more surprising was the reaction of the financial markets. 

The Trump victory led to a huge rally in the financial sector, where Buffett has big positions in companies like Wells Fargo and American Express.

Apart from an equities rally, the greenback and commodities like copper surged after the election, as traders began betting that a Trump-led government will spend heavily on infrastructure and rekindle inflationary pressures.

If you agree that this “reflation” theme can last until year-end, there is a Trump trade worth considering: go long on oil.

Oil prices have so far been left out in the rally as the market prices in higher inflation risks under Trump’s incoming administration.

Trading below US$50 a barrel, oil prices are perhaps held back by concerns over the chance for OPEC to agree on an output cut.

While investors can capitalize on the rising bond yields by taking long put positions on Treasury Bond ETF (ticker TLT), the premiums are now very expensive.

Falling under the same theme, investors can take long call positions on oil ETF (ticker USO) and get them at a still attractive level.

The full article appeared in the Hong Kong Economic Journal in Chinese on Nov. 17

Translation by Raymond Tsoi

[Chinese version 中文版]

– Contact us at [email protected]

Columnist at the Hong Kong Economic Journal

EJI Weekly Newsletter