Oil Price Spike Delivers Opportunity to USO Traders

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The seemingly endless slide in oil prices has finally ended.

And boy was it abrupt. The buying bonanza delivered a massive 24% gain to the United States Oil Fund LP (ETF) (USO) in a mere three trading sessions.

Chalk it up to short covering.

Whether the oil bear has been slain or merely wounded remains to be seen. While oil prices could plumb new depths in the future, I suspect at least a short-term low has been established … which means there is opportunity for tactical bullish USO plays for the time being.

The current pullback in the USO ETF will be the true test as to whether the massive oil gush was a one-hit wonder or the start of a bigger trend change. If it’s the latter, we should see buyers step up before prices descend all the way back to where the rip-roaring rally kicked off last week.

In other words, USO bulls don’t want to see a 100% retracement of this week’s price spike. The best-case scenario would be for USO to descend a touch further — say, into the $14 zone — then to begin rallying anew.

USO Stock Chart

USO

Source: OptionsAnalytix

Given the sharp turnabouts in oil prices lately, implied volatility has climbed to a six-month high. The inflated option premiums that accompany elevated implied volatility are delivering up bigger potential gains to traders willing to step up and sell options.

The cheap price tag of USO, coupled with the increased potential for neutral to bullish price action in oil prices, is making short put plays an attractive proposition here.

Sell the USO Oct $12.50 put for 33 cents or better. Consider it a bet that USO remains above $12.50 for the next month, which it certainly should if this week’s rebound was the real deal.

The max reward is limited to the initial 33-cent credit. Now, 33 cents may not sound like a lot, but you have to put it in perspective. Depending on your broker, the initial cost or margin requirement for selling this USO put could be as little as $150 or so. Capturing $33 (33 cents times 100) on a $150 cost is an impressive 22% return.

Should USO prices tumble back into the abyss, consider exiting by buying to close the put if we take out the recent pivot low near $12.37.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2015/09/oil-price-spike-delivers-opportunity-uso-traders/.

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