Profit From Oil Price Volatility With This United States Oil Fund Trade

USO - Profit From Oil Price Volatility With This United States Oil Fund Trade

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Crude oil prices recently reached a fresh four-year high of $76.90. The ascent is breathing new life into energy stocks and providing plenty of trading opportunities. Today, I want to look at how to profit using the United States Oil Fund LP (NYSEARCA:USO).

At $15.74, yesterday’s close officially brings the year-to-date gain for USO to 31%. It carries all the bullish characteristics you would expect for a stock at new highs. It has perched above rising moving averages across all time frames. It has increasing momentum as confirmed by the RSI indicator. Volume patterns are showing more signs of accumulation than distribution. And, finally, it held up quite well while many stocks were threatening breakdowns this week.

In sum, USO belongs on your radar right now.

What particularly peaks my interest for today are the oil ETF’s volatility characteristics. Options traders use implied volatility to gauge if premiums are cheap or expensive. This can help with selecting the optimal strategy for the environment at hand.

With the recent rally in oil prices, demand for USO options has been rising. Meanwhile, implied volatility has ramped to a three-month high. At 29%, the implied volatility now sits at the 86th percentile of its one-year range.

Typically we consider any readings above the 50th percentile as high, so I view options as ripe for the selling.

Exploit USO Volatility With Naked Puts

With the trend pointing higher, we can use Thursday’s selloff as an opportunity to deploy bullish trades at a better price. The cheap price tag makes USO an appealing candidate for short puts. Sell the Nov $15 put for around 30 cents.

The profit potential is limited to the 30 cents premium and will be pocketed if the fund sits above $15 at expiration. By selling puts, you are obligating yourself to buy USO shares at a cost basis of $14.70. But, you can avoid the purchase if the ETF moves adversely by closing the puts if they sit in-the-money at expiration.

As of this writing, Tyler Craig held neutral USO options positions. Want insightful education on how to trade? Check out his trading blog, Tales of a Technician.


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