Crude Pullback Spells Options Opportunity

Consider this basic options play to profit off USO


Crude Pullback Spells Options Opportunity

If you’re disappointed because you missed July’s monster breakout in crude oil, cheer up — black gold might well be providing a second chance to play it for additional upside.

Since peaking at $109.32, oil has quietly pulled back to $104.50 — a mild 4.4% retracement. With the commodity sitting at its rising 20-day moving average, it’s at an ideal spot for dip-buyers to begin coming out of the woodwork to perhaps incite a resumption of the longer-term uptrend.

What’s more, oil is still outperforming the commodity community, making it a “best of breed”-type play if you’re looking for exposure to commodities.

USOchart 300x232 Crude Pullback Spells Options Opportunity
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Traders looking for a direct route in placing their oil bets might considering playing the United States Oil Fund (USO), which is the most liquid and option-trader-friendly of all the oil exchange-traded funds.

Despite losing a little bit of ground in its relative strength vs. the S&P 500 Index during last week’s pullback, the USO’s comparative relative strength remains in the uptrend that kicked off in early June.

One higher-probability play providing a larger margin of error is selling the September 36 put for 75 cents or better. Consider it a bet that USO will remain above $36 by September expiration. Even if USO falls beneath $36, however, you will still capture some type of profit until it drops beneath $35.25, which is the expiration breakeven point.

To minimize the downside risk, you could either close the position if the strike price of $36 is breached, or perhaps wait for the $35 level to be broken, as it should become a major support level.

Before triggering into the trade, you might wait until USO trades above a prior day’s high to confirm it is indeed pivoting higher. The ongoing retracement might well have a few more down days in the cards before enough buyers are found to halt the decline.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

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