What we did
Today we extended our oil thesis from a May expiry into a June 18, 2026 expiry. The structure is the same barbell we put on in March, sized smaller. Three legs, layered from probable to tail. Total cost of the new addition is approximately 0.78 percent of the portfolio. The May position remains in place. The June position runs alongside it.
Why now
The physical oil market moved from stressed to formally breaking in the first three weeks of April.
A major Wall Street flow note dated April 12 marked today, April 20, as the date the last tanker that cleared Hormuz on February 28 would reach its destination. After today, pre-closure barrels are fully exhausted from the global supply chain. The same note estimated that governments, companies, and consumers collectively drew roughly 250 million barrels of reserves across March and the first ten days of April to cushion the disruption. The note also projected that OECD commercial crude inventories could fall toward operational minimums by early May if refinery throughput cuts escalate. Once inventories approach operational minimums, the system is no longer absorbing shock, it is running on empty.
Dated Brent reached $144 per barrel on April 7, above the 2008 peak. The June Brent futures contract traded near $109 the same day. A spread of that size between physical and paper is the market pricing time as the scarce input, not oil itself. This morning Kuwait declared force majeure on oil shipments. That is the producer side of the same crisis beginning to formalize what physical flows had already revealed.
Our May position was taken three weeks ahead of today's data. The correct response to the data now confirming the thesis was not to chase, it was to extend the window.
The structure
Three legs, one ticker (USO), one expiry (June 18, 2026), in the ratio 1 : 4 : 6.
| Leg | Strikes | Units | Role | Payout shape |
|---|---|---|---|---|
| Long call | $135 | 1 | Tail catcher | Uncapped above $135; premium lost if USO < $135 at expiry |
| Call debit spread | $150 / $180 | 4 | Core payoff zone | Pays linearly between $150 and $180; capped at spread width |
| Call debit spread | $215 / $245 | 6 | Lottery leg | Nothing below $215; capped at $245; small cost, high multiple if it hits |
| Parameter | Value |
|---|---|
| Underlying | USO |
| Expiry (all legs) | June 18, 2026 |
| Total cost as % of portfolio | approx. 0.78% |
| Max capped payout (spreads combined) | approx. 15x cost |
| Naked call tail | uncapped, additive to spreads |
| Max loss | fixed at total premium paid |
| Margin used | none |
| Short naked options | none |
Payout at expiry
USO closed around $122 at entry. The table below shows portfolio-level profit or loss as a multiple of the cost paid, at selected USO prices on the June 18 expiry. Values are approximate, rounded, and assume the short legs are either out of the money (worthless) or fully in the money (maxed).
| USO at June 18 | % above today | Outcome | Return on cost |
|---|---|---|---|
| $120 | -2% | All legs expire worthless | -100% |
| $135 | +11% | $135 call at strike, spreads still out of the money | -100% |
| $150 | +23% | $135 call in the money, spreads starting to pay | roughly -30% |
| $165 | +35% | $135 call + $150/$180 accumulating | approx. +3x |
| $180 | +48% | $150/$180 spread hits cap; $135 call deep ITM | approx. +6.5x |
| $215 | +76% | $150/$180 capped; $135 call richer; $215/$245 activates | approx. +8x |
| $245 | +101% | Both spreads at maximum payout; $135 call deeply ITM | approx. +17x |
| $300 | +146% | Spreads capped; $135 call continues to pay uncapped | approx. +20x |
The maximum loss is known at entry and fixed at the cost of the premium paid. No margin is used. No short naked options exist in the structure. If we are wrong about the oil path, the portfolio absorbs roughly 0.78 percent of drag, and the rest of the book continues to run normally.
How the three legs interact
This is a barbell, not a linear bet.
The long $135 call acts as the tail catcher. If the supply cascade produces an overshoot, this leg captures price action above the spread caps. Its main role is to keep the structure from getting capped out on a genuinely dislocated move.
The $150 / $180 spread is where most of the institutional models point to. Goldman Sachs, J.P. Morgan, Macquarie, and Wood Mackenzie all published disruption scenarios in March with peak Brent estimates that translate to roughly this USO zone. This is the core of the trade. Small cost, meaningful multiple, high probability of being at least partially in the money.
The $215 / $245 spread is the lottery leg. It pays nothing unless the system genuinely breaks. Macquarie's extended war scenario, Wood Mackenzie's sustained disruption scenario, and any prolonged Hormuz closure would move USO into this zone. The cost is small. The payout ratio on this leg alone is material. If the tail event happens, this leg carries the structure.
How we will manage it
We do not hold complex options structures to expiration. The plan:
- Monitor daily against the existing May position.
- Close the $150 / $180 spread when it reaches approximately 80 percent of its maximum payout. Paying five or ten cents to capture the last ten cents of spread value is a losing trade against time decay and gap risk.
- Close the $215 / $245 spread on any fast move that brings it to two or three times its cost. This leg is a lottery ticket, not a hold-to-expiry bet.
- Close the $135 call on strength, partially at two or three times cost, balance at four or five.
- If the thesis fails and oil retraces, accept the full loss. The cost is sized so that a total loss does not meaningfully damage the portfolio.
Why we did not size larger
Three reasons.
First, we already carry the March (May expiry) position. Adding a second expiry is scaling the thesis in time, not in dollars. The combined exposure across May and June is meaningful without being concentrated.
Second, the SPX tail hedge we bought in March is still in place and pays in the same risk-off environment. An oil spike that drives equities lower compounds with the SPX hedge. Adding oversized oil exposure on top would be double counting the same macro bet.
Third, a sized-appropriately asymmetric trade works. A sized-oversized one can torpedo a quarter even when the thesis is correct, because path matters. We want the trade to pay when it pays, without making us wrong on sizing if it does not.
What this is not
This is not a core strategy trade. Our core strategy is selling puts on high-quality businesses at conservative strikes. This is a specialized, time-limited, asymmetric position built around a specific physical dislocation in the oil market. It sits alongside the core book, not inside it.
This is also not a forecast. We do not claim to know where oil will be on June 18. The structure is built so that we do not need to know. The cost is small enough to survive the worst case. The payout ratio is large enough that we do not need every scenario to go our way.
The thesis is simple. The physical market is in confirmed distress. The forward curve is pricing a rapid normalization that the underlying flow data does not support. We are positioned for the scenario the data points to, with defined downside, and we will manage the structure actively as the catalysts arrive.
Carlos Taborda Jaraba
Founder & Portfolio Manager
Workflow Capital