This play uses USO and it bets that oil is going to go close higher by Jun expiration than today, it is going to close higher than today by July expiration, it may lose up to 10% from today's price by October and it will be lower than today by January 2009.

The bet for it going up on Jun and July is based on the summer high pattern and any further speculation as hurricane season in the US develops.

The bet for it going lower in October is based on the idea that deep into the US Elections campaigns and with oil prices higher than today, there is going to be a lot of threats and promises from politicians about taking measures to lower the price of oil.

The main bet, that is going to be lower by January 2009 is based on that we are in a bubble and we may be approaching the maximum extension of the bubble wall.

USO is now at 106.95.
I would buy January 09 145 Put Options. I am basically betting that by January 09 USO will be at the same level or lower than today. My maximum risk is the price I pay for the puts ($12,900), to lose the total amount, USO would have to close 50% higher than today by January 2009, which would put the price of Nymex crude oil at $198 (not impossible, but high enough as to create either a global recession or enough outrage to generate knee jerk measures from Congress).

On the other hand, if USO were to close 5% lower than today in January, I would make $97, closing 10% lower would make $1650 and 15% lower $3311.

However, and since I want to hedge the bet and there are 3 expirations dates between today and January I will be buying a minimum of 3 puts and I will increase the position in 3 multiples.

So, I buy 3 USO 145 Put options for a total of $12,900 (I can lower this cost buying puts with a higher Delta, but that increases my risk) and I sell 1 Jun 107 put, 1 July 107 put and 1 October 101 put.

This reduces my risk to 10,900 from the original 12,900, and improves my gains (shall I be right on price movement) as follows.

If USO closes in Jun 21 5 cents above its current price, I will make $480. At that point, I can either sell 1 of my Jan 09 puts or sell an additional July 107 put (the goal is to be hedge 1-1).

If USO closes in July 19 above 107, I will make an additional 1,000, which added to the Jun $480 will have reduced my total risk from 10,900 to 10,000.

Now I need to sell 2 additional October puts. I can go with the 101, 107 or higher, depending on the price in October.

So, with this simple hedge I will benefit from any rise short term and from any fall longer term, risking $10,000 of capital.

Since you are risking $10,000 I would not recommend this kind of trade to anyone with a total portfolio of less than $200,000 . So you would limit your loss to 5% of your investment capital.

I would expect to obtain 30% to 70% gain on the 10,000 risked, which it is not a bad return for just 6 months.

Just remember than trading options is really risky and you may lose all the invested money. This trade is an example of using options for playing market volatility and it is not, in any way, a recommendation to buy or sell options. Don't ever sell naked options.