The prevailing wisdom about options trading is that you would have a better chance at a crap table.

You would have to include the option quote price x 100 shares

It is a plausible strategy that is called a strangle.

A strangle is when you buy a put and call contract of different strike prices that both expire in the same month. FYI, it would be called a straddle if the strike prices were the same. You will only profit if the stock price moves a certain amount in either direction .

Both the 83 put and 85 call closed today at 2.55 so if you were to enter this position you would have invested 5.10 (510 for the whole contract). To break even at expiration, either your put or call would need to be worth at least 5.10 which would mean that USO would have be either greater than *90.10 or less than 77.90. However, it has traded inside this range during the last 4 weeks. The maximum amount you could lose is 5.10 and this would happen if both contracts expired worthless which would happen if USO was trading between 83 and 85 at expiration.

To determine if this is a good strategy, you need to take a lot of other things into consideration, namely Implied Volatility, and important events that will affect the stock price like earnings reports or the release of major economic indicators.

Options are constantly traded by investment banks who use computer models to take all of the available information available to price options and to exploit any perceived discrepencies. Your advantages might be knowing something that they don’t, dealing in smaller volumes and being able to react more quickly, or taking advantage of situations where their models do not work efficiently.

And regarding the investment ‘not being great,’ you need to think in terms of percentages; you could very well lose 100% or a large percentage of your investment if the stock price does not move sufficiently.

*Thanks to zman for correcting the math there

The previous answer (by Nathan) was right on target as far as the concepts involved. I have a couple of problems with some of the values in his answer. Specfically I have no idea how he came up with “89.60″ and “79.40″ in the sentence “To break even at expiration … USO would have be either greater than 89.60 or less than 79.40.” The correct values are $90.10 ($85.00 + $5.10) and $77.90 ($83.00 – $5.10).

He also mentioned that you want to look at implied volatility (IV). As of Thursday’s close IV was higher than the 30-day historical volatility (HV) implying there is a good chance the options are overpriced, making it more difficult to make a profit with a long straddle.

Finally, I’ll repeat a quote I have given before from Natenberg’s book “Option Volatility & Pricing” (page 187).

“While there is no substitute for experience, most traders quickly learn an important rule: straddles and strangles are the riskiest of all spreads. This is true whether one buys or sells these strategies. New traders sometimes assume the purchase of straddles and strangles is not especially risky because such strategies have limited risk. But it can be just as painful to lose money day after day when one buys a straddle or strangle and the market fails to move, as it is to lose the same amount of money all at once when one sells a straddle and the market makes a violent move. Of course, a trader who is right about volatility can reap large rewards from straddles and strangles. But an experienced trader know that such strategies offer the least margin for error, and he will usually prefer other strategies with more desirable risk characteristics.”

In that quote the phrase “straddles and strangles are the riskiest of all spreads” is emphasized.