Commodities have rather enjoyed the U.S. dollar’s recent death spiral. Greenback weakness has delivered gains to everyone from gold and silver to crude oil. But the upside in oil may soon slow, and that has me eyeing some contrarian trades in the United States Oil Fund LP (ETF) (NYSEARCA:USO).
With overhead resistance looming close, bearish plays in USO may be worth a shot here.
Interestingly enough, the relationship between oil prices and the dollar wasn’t very consistent during the first half of the year. Sometimes they moved together; sometimes they moved apart. But in the month of July we’ve finally seen the pair revert to their normal relationship, with dollar weakness delivering strength to USO.
As shown below, the 20-day correlation between the U.S. Dollar Index and USO is -0.69 which is quite negative.
Since bottoming at $8.65 in mid-June, USO has rallied 18% popping above the 50-day and 20-day moving averages in the process. While rising above both smoothing mechanisms would normally count as a victory for the bulls, USO hasn’t really been responding to either average. Its disrespect is likely due to its trendless nature in recent years.
The six-week rally has driven the RSI indicator close to overbought territory. Matter of fact, it’s perched at the same level as where the last six oil rallies finally topped out. Throw it all together, and bearish oil trades are starting to look attractive.
Short USO Calls
In timing the entry, it’s worth waiting for signs that crude is topping. USO has now carved out four up-days in a row, so we’ll want to see a down candle or at least a break of intraday support before pulling the trigger.
USO’s overall neutral nature, not to mention its small price tag, makes it a prime candidate for option selling. Once we start to see weakness creep in, sell the Sep $10.50 calls for around 29 cents.
You can think of it as a wager that USO will sit below $10.50 at September expiration. But you don’t have to ride it till the bitter end. I suggest exiting if you can snatch back the calls near 10 cents anytime over the duration of the trade.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
