The mini crash in crude oil is starting to show signs of stabilization. From its April highs of $114.83 black gold has declined around $20, or 17%, in the span of just over a week. Despite the severity of the sell-off, oil still remains entrenched in a longer term uptrend. This may be one more in a long line of buyable dips.

Concurrent with the freefall in crude, options trading investors have seen the CBOE Crude Oil Volatility Index (CBOE: OVX) or the “Oil VIX”, rise to levels not seen since the Egypt-uprising induced shock to the oil markets back in February. Looks like a potential short put play may be in the offing.

Source:  MachTrader

In a situation like this — a pullback in the underlying with elevated implied volatility — I usually look to sell out-of-the-money put spreads or naked puts. Given the low share price of the United States Oil Fund (NYSE: USO) my preference is to stick with selling puts outright. The margin requirement isn’t excessive and the percentage return is usually adequate.

Traders looking to sell the high implied volatility in USO options and acquire bullish exposure to the underlying should consider selling the USO June 36 Put for around $.65 to $.75. This short put play positions you to profit if USO does virtually anything but drop precipitously from these levels. By selling this strike, an options trader obligate himself to buy 100 shares of USO for each contract sold in the event it resides below $36 at June expiration. USO was trading at $38.96 this morning.

(Source:  MachTrader)

At the time of this writing Tyler Craig had no positions in the USO.

Follow Tyler Craig on Twitter@TylersTrading.