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I’m recommending a bullish position on United States Oil Fund LP (NYSEARCA:USO), a fund that reflects the spot price of West Texas Intermediate light, sweet crude oil.
Oil is now in a bear market. It recently finished its longest daily losing streak on record before finding some support near the $55 level. That is a positive overall for U.S. consumer and the economy, but it’s certainly not good for energy stocks, which have also been hit extremely hard this month.
There is an excess of oil around the world, and that is sending prices lower. But there are rumors that the Organization of the Petroleum Exporting Countries (OPEC) is considering cutting supply by 1 million to 1.4 million barrels per day (bpd).
A supply cut would do a lot to boost USO, but I think the stock is ready to bounce regardless.
Looking at the chart of crude oil futures below, you can see that the commodity has gotten extremely oversold based on the Relative Strength Index (RSI) reading below 30.
Daily Chart of Light Crude Oil Futures (Source: TradingView)
RSI is a technical indicator that measures the average losses compared to gains over the last 14 trading days. It does a good job of identifying when bullish momentum is beginning to appear before it is apparent in the stock price.
That oversold condition has already led to a mild bounce off of support just above the $54/barrel level.
Daily Chart of United States Oil Fund LP (Source: TradingView)
The chart of the USO above looks very similar. The RSI indicator for USO is making a sharp reversal to the upside from oversold levels, and I’m expecting the stock price to follow.
USO has so far been able to hold above support at about $11.65, and it even retested that level yesterday before ending the day in the green.
As long as this level is able to hold on any further pullbacks, today’s debit spread recommendation should return a great profit as oil rebounds.
Using a spread order, buy to open the USO Dec. 28th $12 call and sell to open the USO Dec. 28th $13 call for a net debit of about $0.35.
A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this call debit spread is a way to lower the cost of buying bullish call options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.
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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.