Crude Pullback Spells Options Opportunity

by Tyler Craig | July 30, 2013 8:30 am

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[1]), 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.

Endnotes:
  1. USO: http://markets.financialcontent.com/investplace/quote?Symbol=USO

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