USO: Bet With the Bulls as Crude Oil Tumbles

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Oil bulls’ dreams were dashed this week as crude oil tumbled to a new six-year low amid intense selling pressure. The descent of West Texas Intermediate crude oil below $43 a barrel upended the recent bottoming attempts in the commodity.

USO: Bet With the Bulls as Crude Oil TumblesOil stocks and the popular oil ETF — United States Oil Fund LP (ETF) (NYSEARCA:USO) — followed suit, dropping notably over the past week.

On a bright note, the energy sector actually exhibited impressive relative strength during Monday’s trading session rising on the day while oil crumbled, perhaps signaling that the selling in oil stocks is getting a bit overdone in the short run.

The USO ETF wasn’t so lucky. Its performance is tied at the hip with movements in oil so, naturally, it took another dive into the abyss.

Despite the denial of the recent bottoming attempts in the price of USO, the bulls still have a chance or two at recovering from the recent setback. Let’s look at the two most bullish developments we could see develop in the technical structure of USO.

  1. A successful retest of prior support: The USO ETF is currently testing its prior support zone near $16.30 (roughly the equivalent of crude oil testing $43 a barrel). If the bulls can mount a counterattack and successfully defend this threshold, we could have the beginning of some type of double bottom.
  2. A failed breakdown: If the selling intensifies and USO slides decisively below $16.30, the last hope for the bulls is to turn it into a failed breakdown. Sometimes referred to as a bear trap, this pattern would transpire if after breaking support USO was able to rise back above the $16.30 zone, effectively trapping all the short sellers who jumped on the breakdown.
USO
Source: Stockcharts.com

Barring one of these two patterns developing in the coming week, the future for the oil ETF looks grim.

Bet With the Bulls With USO Options

If one of these two patterns develops, consider capitalizing on an oil rebound by selling puts in USO. Option premiums have re-inflated amid the recent downturn, making short puts all the more attractive.

Sell the Apr $15 put for 52 cents or better. Consider it a bet that USO sits above $15 by expiration, which it should if one of the two bullish scenarios plays out.

The reward is limited to the initial 52-cent credit. By selling the $15 put you obligate yourself to buy 100 shares of USO if it falls below $15. Traders finding this idea distasteful can avoid assignment by simply buying back the option if it moves in-the-money prior to expiration.

At the time of this writing, Tyler Craig owned short puts and calls on USO. 

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Article printed from InvestorPlace Media, https://investorplace.com/2015/03/uso-etf-bet-with-bulls-crude-oil-tumbles/.

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