Not all dips are created equal. While some selloffs provide quality, low-risk buying opportunities, others should be avoided at all costs.
Dips of the latter variety inflict significant damage to a stock’s trend and often presage a full-fledged reversal into a downtrend. Today we have a trade idea that falls into the other camp — a low-risk trade opportunity. Best of all, this one puts cash in your pocket right away, just for making the trade.
The current bout of selling in the equities market is resulting in the termination of many multi-month uptrends. As a result, it’s important to be cautious about entering dip-buying mode.
One Exchange-Traded Fund that has thus far weathered the market freefall with its uptrend intact is the United States Oil Fund (NYSE:USO). The recent three-day selloff has brought this oil ETF right into a potential support level at its rising 20-day moving average. If we see a bounce in this area, a bullish play may be in the cards.
One of my plays of choice for the USO is selling put options. The cheaper share price, coupled with liquid options listed at every dollar interval, make this a great vehicle for this particular strategy.
To exploit the higher rate of time decay inherent with front-month options, instead of buying calls, you could “sell to open” the USO Dec 34 Puts for around 60 cents. Provided the USO remains above $34 over the next four weeks, you stand to keep the $60 that you collect when you initiate the trade.
As a reminder, selling a put option obligates you to buy shares of the stock at the strike price. If USO falls beneath the $34 level, you will be required to purchase shares of stock at a cost basis of $33.40 ($34 strike price — $0.60 credit).
The maximum reward is limited to the credit received at trade inception and will be realized as long as the stock remains above the put’s strike price by expiration.
At the time of this writing, Tyler Craig had no positions on USO.