Special Report, March 2001 This report will only be published for a limited time on this website. It is available to subscribers of Early Warning Report and was delivered to all subscribers with the March Issue of EWR.

Dear Reader,

Two new developments make the odds for a $100 crude oil price spike even stronger.

First, is the election of hard liner Israeli Prime Minister Ariel Sharon. Hated by Muslims everywhere, in part, for the massacre of 2,000 Palestinian refugees in 1982 by troops under his command, the Sharon victory will likely inflame Mideast violence, while increasing Saddam Hussein's influence.

Second, Secretary of State Colin Powell just called Iraq a threat to "the children of the region," and reaffirmed the Bush administration will force Hussein to destroy his weapons of mass destruction. This is a cynical replay of the 1990 Bush Senior "baby incubator" hoax, used to trick the American public into supporting Desert Storm (see the 2/01 EWR).

With all the elements falling in place for "Desert Storm II," what's the best way to make money from this insanity?

To profit from dramatic oil market price moves, you can't beat crude oil option combinations, known as "strips." During last fall's rally, crude oil call options that EWR subscribers bought earlier for as little as $500, skyrocketed to as much as $10,000. Buy your strips before the next Chaostan crisis (quite possibly a US-backed civil war in Iraq against Hussein), and you might do even better.

One reason options are my favorite energy speculation is that when moves are big and fast, they deliver far greater profits than energy stocks, as shown in the Kuwait War Profits chart. Expect this to happen again.

Crude oil contracts for spot (immediate) delivery, and up to six months out, respond much faster to Chaostan shocks than more distant contracts. For example, during the Kuwait War when spot oil peaked around $40, contracts for delivery a year or more away remained around $21. This is because refiners and end users bid up nearer-term contracts to secure scarce supplies for current needs, while staying hopeful that lower prices would return later on.

The added volatility in closer contracts causes options on these contracts to profit faster than those on the slower moving, distant contracts. But the distant options have more staying power. Strips fill both needs.

To construct a strip, you buy a series of call options on crude oil future contracts every six months in the future. Right now [at the publishing of this report] you can buy the following $35 per barrel strike price option strip for less than $2000: December 2001, June 2002, and December 2002.

The options allow you to participate in the changing value of the underlying futures contract for 1,000 barrels of West Texas Intermediate crude oil. The right is good until the expiration of the December 2002 option in mid-december 2002, so the strategy has plenty of time to work.

1. Dynamic Price Play. Usually instant profits from higher prices, without the frustrating lag times of weeks or months typical of oil stocks.
2. Flexibility. The luxury of taking partial profits on the way up (something I recommend for all speculations) without abandoning your longer-term bullish position.
3. Fixed-Risk Leverage. A highly leveraged position in a potentially explosive bull market with a limited risk of less than $2,000 -- and one you can buy and sell with the same ease of any exchange-listed stock or other option contract.

A return to Kuwait War highs at $40 per barrel would make each strip worth $5,000. A run-up in today's inflation-adjusted dollars, based on the prior Iranian Revolution high, would come to roughly $85 per barrel, making the recommended strip worth at least $50,000 at option expiration.

Compare this to a big-company oil stock like Exxon Mobil (XOM). From December 1998 to October 2000, crude oil rose roughly 236%, while XOM gained $20 per share, or 36%. This was not bad, but it was not even close to the gain in crude oil, or the even bigger gain in EWR strips, as of late 2000.

At today's prices you can buy four crude oil strips (12 options total) for the price of 100 shares of XOM ($80/share). Should crude spike to $85 per barrel, these four strips, costing you around $8,000, would be worth at least $200,000, and possibly much more if the move occurs within the next six to twelve months.

Yet, there is a tradeoff. Should crude fail to rise between now and December 2002, strip holders would take partial losses or the options would expire worthless. XOM holders would still own the stock.

What about Natural Gas and Unleaded Gasoline options? Periodically a good speculation (I may recommend them later), they currently do not come close to the spectacular potential found in crude oil strips.

We never know for certain what the future holds, but we do know that when a new Chaostan crisis explodes, crude oil options could double or triple in value in just hours or days. So if you like to speculate -- don't delay taking action.

You cannot trade crude oil options through your stockbroker because they are listed on the New York Mercantile Exchange. Therefore, you need a licensed commodity broker to buy them.

My recommended broker is Sue Rutsen at Fox, Inc. Sue and her team have been serving EWR subscriber option trading needs since 1995. They know the strip strategy inside and out. Call Sue at (800) 345-7026 or (312) 341-7494, and refer to this Special Report at chaostan.com.

If you are new to options and are a current subscriber to Early Warning Report, tell Sue and she'll send you the IPS Short Course In Futures and Options, a $14.95 bookstore value, absolutely free.

Read EWR's disclaimer.

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