Play Crude Oil’s Support Test With USO

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Crude is crumbling this week, delivering disappointment to oil bulls. Ever since crude oil tagged $50 earlier in the month, it has been slip sliding away. Some oil stocks have followed in kind, giving back much of their recent gains.

Is the nascent oil rebound destined for failure?

Perhaps. But take heart — one final potential support zone remains that could halt the decline. If bulls successfully defend their territory, the oil chart will remain constructive. If they fail in their support bid, however, all bets are off and oil’s chart officially returns to looking dismal.

OIL chart

Source: Stockcharts.com

As shown in the accompanying chart, the ongoing downturn has carried oil prices back below all major moving averages, and a significant support test of the $43 zone is fast approaching. In fact, prices are probing the support zone in early trading Tuesday morning.

Regardles of whether you’re bullish or bearish, this movement presents an interesting opportunity in the Street’s favorite oil ETF: the United States Oil Fund (USO).

Twin USO Trades for Oil Speculators

If you’re willing to bet with buyers the current USO pullback is providing a potential low-risk entry for bullish option plays. Fortunately, implied volatility has ramped higher amid the oil drop, inflating option premiums to more attractive levels for selling.

One option is to sell the Nov $13 put for 30 cents. Consider it a wager that USO will remain above $13 for the next month. If it does, you stand to gain the initial 31 cent premium. If your broker holds aside 15% of the stock price in margin requirement for the trade (which is typical), the initial cost will be about $200.

Capturing $30 (30 cents x 100) on $200 amounts to an respectable 15% for a trade that has a high probability of profit.

If support should give way, oil pessimists may want to pull the trigger on new bearish plays. A bear call spread should do the trick. Sell the Dec $15/$17 call spread for 33 cents. The max reward is limited to the initial 33-cent credit and will be captured if USO sits below $15 at Dec expiration. The max risk is limited to the distance between strikes minus the net credit, or $1.67, and will be lost if USO rallies above $17 by expiration.

At the time of this writing Tyler Craig owned short option positions in USO.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/play-crude-oils-support-test-uso/.

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