The new uptrend in crude oil is facing its first major test in many moons. News of increased production has sent prices tumbling 11.5% from $72.90 to below $65. Many minor support levels have caved in the process. Fortunately, the long-term uptrend is still intact which suggests the weakness could be creating a buying opportunity. Today we’ll assess the action with the United States Oil Fund L (ETF) (NYSEARCA:USO).
The three-week retreat has ushered USO back to its rising 20-week moving average. It’s an area that has proven to be a gathering ground for dip buyers in the past and is thus a zone worth watching. If bulls are willing to defend their turf, we should see an upside reversal soon.
Take a look at the weekly chart below.
As usual, the daily chart reveals greater detail of the recent turnabout in oil prices. The weakness has been severe enough to break the 50-day moving average, but I wouldn’t place too much stock in the breach. USO has a history of not respecting these moving averages, so I’m letting the weekly uptrend keep me in the bulls’ camp.
At this point, oil is getting oversold enough to justify initiating bullish exposure.
The USO Trade
Demand for options has been rising alongside the price slide, and that’s a good thing for option sellers. The implied volatility rank now stands at 70% and is increasing the appeal of strategies like naked puts and short strangles.
For traders willing to acquire bullish exposure down here, naked puts are the way to go.
Sell the 13 July $12.50 put for 21 cents. The premium received represents the maximum profit and is yours to keep if USO sits above $12.50 at expiration. Now, if the put is in-the-money at expiration you will be obligated to buy shares at an effective purchase price of $12.29. Such are the promises made by a put seller. If you’d prefer to sidestep assignment then simply buy back the puts at expiration if USO is below $12.50.
As of this writing, Tyler Craig held bullish options positions in USO. Want more education on how to trade? Check out his trading blog, Tales of a Technician.