Use USO Short Puts to Play Oil’s Dip

by Tyler Craig | July 26, 2012 8:20 am

Few areas of the market were spared from this week’s euro-driven swoon. What’s more, the severity of the selling was sufficient to breach key short-term support levels in many important areas of the market such as financials (XLF), transports (IYT) and small-cap stocks (IWM).

While I’m a fan of buying dips in general, those that breach pivotal price zones and otherwise reverse short-term trends put into question whether any bounce is worth playing once it transpires.

Of course, the usual suspects like U.S. Treasury bonds and the mighty U.S. dollar rallied, but such is to be expected when the market switch gets flipped to risk-off.

Fortunately for oil bulls, the three-day slide in crude has been relatively shallow, leaving the existing short-term uptrend intact. With the path of least resistance remaining sideways to higher, selling put options in the United States Oil Fund (NYSE:USO[1]) appears a reasonable strategy for exploiting the current retracement.

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Traders willing to bet USO will not fall to $30 by September expiration should consider selling the Sep 30 put option for 62 cents or better. By selling the put, traders obligate themselves to buy 100 shares of stock at $30 should USO fall to this price by expiration.

The max reward is limited to the initial $62 received at trade entry and will be captured as long as USO remains out-of-the-money.

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

  1. USO:

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