Price action in the oil pits continues to be constructive. And that means opportunity lurks for crude bulls. With the ever-popular United States Oil Fund LP (ETF) (NYSEARCA:USO), traders have a bounty of ways for capitalizing on further strength from oil prices. Let’s head to the charts to hear what USO is telling us.
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First off, the USO exchange-traded fund has climbed a solid 24% since its intermediate-term low from early August.
Fans of the leveraged oil ETF — ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO) — will note UCO shares have lifted 47% over the same time frame.
The surge has been sufficient in carrying shares above all major moving averages. Moreover, the 200-day moving average is now rising for the first time since the oil bear market began in earnest late-2013. That’s a good omen for spectators seeking solid confirmation that the long-term picture finally appears bullish.
Oil’s ascent has helped the turnaround in the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE), which is now firmly entrenched in an uptrend with a reputation of rewarding dip-buyers for months now.
With this morning’s oil pop fading as I type, we may need a bit more backing-and-filling before USO is ready for another launch higher. Fortunately, we can use options to structure a position to profit as long as prices don’t completely fall out of bed here.
Go Naked With USO Puts
The cheaper price tag of the oil ETF makes it a prime candidate for cash flow strategies like covered calls and naked puts. If you don’t already own shares, I suggest starting with a naked put. The margin requirement is lower, which generates a higher return on investment. Plus, short puts provide the opportunity to grab USO at a discount to current prices should oil prices bite the dust in the coming weeks.
Sell the USO Nov $11 puts for 28 cents or better. Consider it a bet that the oil ETF will sit above $11 a month from now. The reward is limited to the initial 28 cents and will be captured provided the puts expire out-of-the-money.
By selling the put, you obligate yourself to buy 100 shares of USO at $11. Traders wishing to sidestep assignment could simply buy back the put near expiration if they move in-the-money.
As of this writing, Tyler Craig owned naked puts on USO stock.
