USO ETF: Trade Oil Prices Into the Ground

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There were cheers from the streets of Iran this week (and jeers from most of Capitol Hill, Israel and Saudi Arabia) following a historic compromise aimed at nuking the proliferation of nuclear arms.

And United States Oil Fund (USO) bulls are probably feeling like steers as, technically speaking, oil prices look to be heading lower to retest the 2015 lows.

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Following the agreement, Iran is now in position to begin supplying the market with roughly 1 million plus barrels of oil a day — oil that it doesn’t need given an equally massive glut already in place.

Not that Iran’s re-entry into the oil market is as simple as turning on the spigot and distributing it by Amazon Prime. Still, the potential supply should continue to put pressure on oil prices and shares of the USO ETF.

There’s also an estimated 30 million to 40 million barrels in tanker stockpiles waiting to be distributed by Iran, though the quality of that oil could make it tough to sell.

Additionally, bulls may want to steer clear of the USO ETF due to wildcards like weakened demand by China as it faces an economic slowdown, Greece and the possibility of a stronger U.S. dollar.

USO ETF Weekly Chart

USO ETF weekly chart
Click to Enlarge
Source: Charts by TradingView

Breaking the 62% level in USO is not a good sign. Many technicians agree that when the 62% retracement fails to act as support, the stock in question is readying for a full retest of lows. In the case of USO, that would mean back to the March low of 15.61.

Given that $15.61 is a tad more than 9% lower — and given that the tiny inside candle shown on the weekly chart sets up as a bear flag held in place by the 62% retracement level acting as resistance — USO looks positioned to go lower.

Lastly, with USO’s weekly stochastics not suggesting a bottom is in place yet, it’s time to look at an options strategy to profit from lower prices in this oil fund.

The Trade: USO ETF Long Put

USO volatility chart
Click to Enlarge
Source: Charts by TradingView

Also nice to consider: At 34 cents max risk, this spread can realize a profit of 66 cents for nearly a 200% return on investment if USO is below $16 at expiration.

And if a trader wished to use a technical/money stop above $18.23, the one point of USO stock risk would work out to an estimated loss of 17 cents, or about half of the original debt paid.

Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.

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The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2015/07/uso-etf-trade-put-spread/.

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