www.thestreet.com By Steven Smith Staff Reporter 03/04/2003 06:52 AM EST

Oil, oil everywhere: in the news, on people's minds, filling SUVs, heating homes, monopolizing the business section. And yet, so little profit to be had.

Not to sound like reality TV, but the current environment presents the ultimate challenge: Can anyone find a reasonable, defendable, potentially rewarding way to trade in today's environment, without risking the mother of all losses? Options, as always, will give you a fighting chance.

I know my compatriots on this site have done a great job mapping the current oil landscape. My condensed version is that the prospect of war with Iraq has put a $5 to $6 premium on crude prices.

"There is a lot of panic waiting for not necessarily the outcome, but the initiation of a set of events that will lead to a resolution," said Bill O'Grady, an energy analyst with A.G Edwards.

In the last six months, April crude oil futures have jumped 38.5% to nearly $40 a barrel, more than 17% higher than the June oil future price of $33.10.

But O'Grady is quick to point out that fundamentals, such as a cold winter, turmoil in Venezuela, rising natural gas prices and an overhang of uncertainty, will all lead to an inability to quickly replace lost reserves and increase production capacity. "I see a floor on oil prices somewhere above the $29-per-barrel range for the next 18 months," O'Grady concludes. He thinks that's where the equilibrium will be found as war fears dissipate and positive fundamentals underpin the market.

Unfulfilled Potential

Certainly the oil stocks and their proxies are, for whatever reason, acting poorly in the face of rising oil prices.

Exchange-traded offerings, such as Barclay's iShares' Global Energy Index Fund(IXC:NYSE - news - commentary - research - analysis) and the Merrill Holder Trust Oil Services(OIH:NYSE - news - commentary - research - analysis), have also lagged the market. The business fundamentals are beyond the scope of this article and therefore we will discuss oil futures and options as the purest means to position ourselves to profit from the future direction of oil prices.

That brings us back to the top. Conventional wisdom has it that oil prices will drop some 12% to 15%, or $5, once the U.S invades Iraq. So, that means we will be operating under the thesis that front month (as measured by the April futures) has an embedded war premium of about $5 over June. April options volatility is also running at about 50, or about 5 points higher than June. We assume both will narrow and the price of oil will stay above $30 during the next four months.

Let's see if we can take advantage of the price discrepancy in both the underlying oil price and their related options valuations.

The Trade

On Monday, Light Sweet Crude for delivery in April closed at $37.65 on the New York Mercantile Exchange. Based on settlement prices, one could sell the April $35 call for $3.25 and buy the April $37 call for $1.20 -- otherwise known as the bearish vertical call spread -- for a net credit of $2.05. The thesis is that, given recent events, the price of April oil won't go much above $37.05 by April expiration. The table below shows the risk/reward and break-even.

The risk/reward on this may seem great, but remember we are betting that prices will fall once war breaks out. And we are going to couple this position with a bullish June put spread. This is to incorporate the second half of our thesis: that oil prices should have a floor of around $29 over the next four months. It will also help offset an unexpected rise in price and thereby act as a hedge to our April position.

War-Oil Options

Position Value Net Credit/Debit Max Profit at Less Than $35 Break Even at $37.05 Max Loss at Greater Than $38.25 Sell 1 April $35 call $325 $0 ($205) ($325) Buy 1 April $37 call ($120) $0 $5 $0 Net $205 $205 $0 ($325) Source: TSC Research

June futures closed at $32.80. Sell one June $33 put for $3 and buy one June $30 put for $1.50 for a net credit of $1.50. Without going through all the math, the put position in isolation gives you a maximum profit of $150 per spread if the June futures close above $33. The maximum loss is $150, which is realized at or below $28.50.

But when the two positions are combined, that raises your break-even to $38.55 (thanks to the net credit on the put spread), and lowers the break-even in June to $26.45, thanks to the credit in the April call spread.

And the maximum overall profit increases to $355 should the April/June spread narrow $2 to the $33-$35 range.

daily.stanford.edu Dig Deeper By Zachary Haldeman Tuesday, March 4, 2003 last updated March 4, 2003 12:17 AM

Despite President Bush’s claims of moral certainty, he has offered mere platitudes regarding the ethics of attacking Iraq. Not only is an ethical justification necessary, but also it is the single legitimate justification for war.

Why should ethics motivate a decision on war or any other subject? To strive for anything less than the ethical ideal is to compromise one’s values, and to compromise one’s values is to subjugate oneself to the will of others, which is to invite tyranny and mob rule. Without ethics to guide our government in all it does, we are subject to tyranny and mob rule at home and abroad. Thus, the ethical justification for war is the value of freedom.

Most of the world does not understand the value of freedom and why only freedom can justify war.

Many nations stress the necessity of consensus building and multilateralism. However, neither of those involves actually convincing anyone whether war is right or not; instead, consensus-building and multilateralism are praised for their own sake.

According to a recent French memorandum on Iraq, “The unity of the Security Council must be preserved” in order to find a peaceful solution. Why? Is no action right unless everyone agrees with it? And is a peaceful solution necessarily better than anything else?

Unity is good only if it is a consequence of people pursuing the same values and ideals. This is not the case in the Security Council, which has made no ethical case whatsoever. Furthermore, pacifism rewards the most evil people in society. Peace and unity are not unconditionally good.

The ethical norm that should guide nations is freedom. In a social context, freedom consists of individual rights; principally, the right to live, which is the source of all other rights. The right to live is the right to act in accordance with one’s judgment and values, so long as that does not impose upon others any obligation except the obligation not to initiate the threat or use force.

Individual rights are a uniquely American ideal. America was the first nation in which citizens were not servants of a god or a king or the state; instead, Americans established the government in order to secure freedom by protecting the rights to life, liberty, property and the pursuit of happiness. In practice, Americans violated all of these rights from the very beginning, and even today our rights are in dire straits, but the ideal of freedom remains all-important.

A government is legitimate only if granted its power by free people. People who do not enjoy freedom are not able to give consent to their government. Nations that neither uphold nor even grant any rights cannot claim a right to non-interference. That opens the door for some action against Iraq, but when is war justified?

The threat and use of force is justified only when in defense of freedom. If America still intends to uphold freedom through individual rights, then we have the right to take any action appropriate to defend ourselves from those who threaten us with force.

In all of this talk about respecting freedom and individual rights, isn’t there a contradiction in violating the rights of foreigners with American military action? Is an American life worth more than an Iraqi life? No, any life is self-valued. Your life is what you make of it.

If you place no value on your life, and you allow dictatorial regimes to control you, then you are responsible for the consequences of that. Thus, those Iraqis who tolerate an oppressive and deadly regime are responsible for defensive strikes by free nations, and in such a strike, the Iraqi regime is solely responsible for the deaths of those Iraqis who resisted the freedom-hating Iraqis.

Your government is not a separate entity: You are responsible for it. You are responsible for changing it or dissociating from it if it threatens to violate individual rights to life, liberty, property and the pursuit of happiness.

In contrast, the United States of America is not the liberator of the oppressed, and it has no duty or ability to be such.

The United States might find it in its own interest fight a war to end an evil regime, but we can never force anyone to be free. Both liberated and oppressed people must recognize the value of individual rights for themselves.

If some peoples continually produce oppressive regimes, hostile to freedom at home and abroad, then America should defeat them time and time again until they learn for themselves to respect individual rights.

We should do all that we can to support those who demand these rights from their governments, including the students in Iran and the strikers in Venezuela. We cannot force freedom upon anyone, but we should assist those who are working for it already.

Do not let our own government take away the very freedom it is supposed to protect (e.g., through the Patriot Act or through compromises with freedom-hating nations). Reclaim your rights to life, liberty, property and the pursuit of happiness. Reclaim your freedom, even if that means war.

Zachary Haldeman is a senior majoring in mathematics. You can reach him at haldeman@stanford.edu.

www.vheadline.com Posted: Tuesday, March 04, 2003 By: Robert Rudnicki

Opposition negotiator in the Organization of American States (OAS) facilitated peace negotiations Americo Martin has insisted that the opposition will continue to push for an electoral solution to Venezuela's ongoing political crisis, either a revocatory referendum or a constitutional amendment that would cut President Hugo Chavez Frias' term in office and allow early general elections. 

"The government knows our stance and we know the government's point of view. So we could reach an agreement. I am not optimistic or pessimistic, I am just working on the documents I have in hand. I think there is huge pressure in favor of an electoral solution."

Negotiations have made little progress over recent weeks following the signing of a non-violence agreement, a talks were suspended due to Organization of American States (OAS) secretary general Cesar Gaviria's unavailability and then the government's requests to postpone sessions.

www.vheadline.com Posted: Tuesday, March 04, 2003 By: Robert Rudnicki

According to Currency Administration Commission (Cadivi) president Edgar Hernandez, a list of goods for which will once again be able to be imported on the Commission's website tomorrow. This follows a six week ban on dollar sales, which has virtually halted all import activity.

President Hugo Chavez Frias has already said that dollars will not be made available for luxury goods such as 10-year-old malt whiskies, insisting that funds will only be made available for necessities.

Hernandez clarified this point saying "those with products not on the list need not apply."

In the initial stages $600 million will be made available each month, around half of normal demand, with fast food chains likely to suffer as Hernandez claims they will not be on the priority list and will have to wait before their dollar applications can be processed.

www.vheadline.com Posted: Tuesday, March 04, 2003 By: Robert Rudnicki

Talks between government and opposition negotiators are scheduled to continue this week despite the unavailability of Organization of American States (OAS) secretary general Cesar Gaviria, however the earliest possible session is likely to be this Wednesday.

Gaviria has prior engagements in Bolivia this week and is not expected to return to Venezuela until next week.

Coordinadora Democratica negotiators are hoping that the discussions will continue to concentrate on an electoral solution to the current crisis, as laid out by former US President Jimmy Carter.

Talks have been very stop and start over recent weeks, with major disagreement over the arrest of Venezuelan Federation of Chambers of Commerce & Industry (Fedecamaras) president Carlos Fernandez and the detention orders issued for several other strike leaders.