Tuesday greeted investors with a mixed bag of performance. While commodities and bonds were up, stocks and the U.S. dollar were down. Of all the popular markets, crude deserves the most attention today.
This morning, oil prices rallied to $43.46 — scoring a 3.5% gain following a successful breakout of a recent trading range.
Any and all strength in oil prices has been snuffed out in short order lately, so this morning’s breakout definitely marks a change in character. Stock traders looking to get in on the action can use the United States Oil Fund (USO) to game oil’s next move.
USO is the leading oil ETF these days and does a pretty good job of tracking crude oil prices in the short run.
The following 10-day chart of crude oil prices illustrates the recent trading range along with this morning’s breakout over the $42.60 resistance level. Owners of the USO ETF will want to see this level hold if the oil breakout is going to go the distance. So far, the mid-morning pullback is retesting this prior resistance level and holding, so keep an eye on it for the rest of the day to see if the breakout sticks.
A Pair of USO Breakout Plays
If nothing else, today’s breakout provides an actionable opportunity for trading the USO ETF. Traders willing to wager the breakout sticks could initiate new bullish plays here while those thinking the breakout fails and crude oil continues its descent could fade the breakout with a bearish trade.
Bullish USO ETF Trade
The low price tag and high implied volatility combine to make the USO ETF a prime candidate for selling puts. Sell the Dec $12.50 put for 30 cents. The max reward of 30 cents will be captured if USO sits above $12.50 at Dec expiration. If your broker holds aside $190 or roughly 15% of the stock price in collateral for the trade, the $30 potential profit represents an attractive 15% return on investment.
Bearish USO ETF Trade
If you think this morning’s breakout morphs into a fake-out, sell the Dec $14 call for 35 cents. The max reward of 35 cents will be captured if the oil ETF sits below $14 at expiration. The max risk is unlimited with this naked call play, so consider exiting to minimize the loss if the USO ETF breaks aggressively above $14.50
As of this writing Tyler Craig, owned short puts on USO.
