This morning, I’m recommending a bearish call write on United States Oil Fund, LP (NYSEARCA:USO), a fund that tries to match the spot price West Texas Intermediate light, sweet crude oil delivered to Cushing, Oklahoma.
Last week, the price of oil dropped when it was reported that President Trump may be looking to ease sanctions on Iran. Tensions have been elevated between the two countries since the sanctions were imposed back in June, but with the departure of John Bolton, it looks like the White House may soften toward Iran.
It looked like oil would continue channeling between the $50 and $60 levels.
But on Sept. 14, missiles struck Saudi Arabia’s Abqaiq facility. Abqaiq is one of Saudi Arabia’s largest facilities, and the attack dramatically reduced global oil supply, which sent prices above the $60 level.
Oil Will Probably Come Back Down
The reason for the spike in oil prices is clear. The attack on Abqaiq knocked out more than 5.7 million barrels of daily crude oil production, which is more than 50% of Saudi Arabia’s daily production and over 5% of global daily oil production.
But spikes due to supply issues usually don’t last, and I’m expecting crude oil prices to fall back in the $50-$60 range.
It’s also worth noting that, if concerns about easing toward Iran pushed oil prices down last week, this attack will likely complicate U.S. relations with Iran. Both the U.S. and Saudi Arabia are blaming Iran for the attacks, and many independent analysts have said Iran was likely involved. That could mean the U.S. would continue sanctioning Iran, preventing its return to the world’s crude oil market.
I don’t expect oil prices to keep rising, and they may even start to fall. Once they do, USO could drop back to its levels prior to the attack.
A Lot of Resistance to Overcome
If you look at the daily chart of USO, you can see that prior to the spike in oil prices, it was channeling between support at $10.50 and resistance at just above$12.50. Now it has cleared its upper bound.
Daily Chart of United States Oil Fund, LP (USO) — Chart Source: TradingView
But you can also see two other solid resistance levels. The first is at just above $13.25, which USO failed to clear after the spike. The second is at around $14.
Oil prices are already starting to slip this morning, and even if prices remain slightly elevated, I don’t think USO will be able to clear the $14 level. I’m recommending a bearish call write to collect some income on the fear around spiking oil prices.
Sell to open the USO Nov. 15th $14 call for a credit of about $0.30.
Note: There are several November expirations available for USO options. Be sure you are opening the monthly options that expire on Friday, Nov. 15, 2019.
About Naked Call Writes
These calls obligate you to sell USO at $14 a share if the rises higher than that by option-expiration day (Nov. 15). Remember, one option contract equals 100 shares of stock.
One risk is that USO could unexpectedly move up sharply. If that happens, you would need to buy back to cover and close the naked call option for a loss.
The other risk if the stock moves up sharply is that the call will be assigned. This means that for every 1 call option you sold to open, you would need to buy 100 USO shares on the open market at an unknown higher price and then sell the shares at the $14 strike price for a loss. Keep your positions small.
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