solar, oil, it's all about energy these days

initial thoughts: solar industry is pretty sick, the companies keep blowing out the earnings estimates, and you can see from the way that the solar stocks have responded-- FSLR, STP, SOLF, CSIQ (the really sick 30% jump), and even LDK, which had been hammered early is now back to even. I have always thought about playing a straddle on the solar industry pre-earnings, but once again was too late to jump in for the fun this time around. however, the solar industry is an extremely difficult one to play, as the volatilities are extremely high, and the valuations are ridiculous by any measure. the growth is there, but i am going to stay away for the time being.

crude oil continues it's ridiculous rise, almost hitting 127 a barrel this morning. i'm short on crude oil, and believe that the price of crude should be more around $80-90 dollars. The fact that the commodity has spiked so quickly and suddenly in the last month or so can be explained by many as mostly speculation and a hedge against the USD. However, in my opinion, I feel like there will be a few factors that will pressure the price of crude to go down in the near term.

First, I believe that the USD will make a rebound, which would lead to the selling of crude oil by investors, as it would no longer serve as an effective hedge against the dollar, if it is rising. The reason for this is because the USD has been at lows for quite a while, and the government has been looking to stabilize and strengthen our currency to prevent inflation fears, both in the states and also abroad.

Second, the high price of oil has really killed much of the demand for it. Economies are slowing quickly, and people are also limiting their driving, which also leads to limiting their spending because gas costs are so high. Thus, in general, there is no incentive for anyone (even oil companies) to have the price of gas at astronomical levels, because both developed and emerging economies would not be able to sustain the growth so that the demand of oil continues to be even. I think this is called elasticity in the economics world, but I don't remember.

Third, there is just fundamentally no reason for crude oil to be so high. Inventories have been pretty much steady, and demand has been falling recently due to the high cost coupled with the economic slowdown. Thus, I believe that much of this price is due to speculators in the market trying to drive the price up. Once there is a catalyst that indicates that there will be a downside to crude oil, I firmly believe that crude will shed a significant portion of its value from its current, all time highs.

Thus, here are the current plays that I have on shorting crude oil, in my portfolio as of 5/13/08.

Sold 2 contracts of the June 47.5 PUT on VLO
Sold 1 contract of the June 45.0 PUT on VLO
Bought 3 contracts of the June 50 CALL on VLO
Bought 2 contracts of the May 100 PUT on USO
Sold 1 contract of the May 104 CALL on USO

Selling PUTS means that I am hoping the stock goes bullish.
Selling CALLS means that I am hoping the stock goes bearish.

The reason I am playing VLO (Valero) is because refiners make more money when crude is cheaper, because higher crude means that their profit margins are being squeezed, which in turn means they make less money, and have a hard time increasing their price in relation to the increase of crude.

USO is an ETF fund that basically tracks the price of crude oil. Obviously looking for that fund to go down, asap. Options expire on Friday. Good times.