After running like a scalded dog for three weeks straight, crude oil is finally starting to drop from its lofty heights. Since reaching a peak of $106.95 last Monday, it has undergone an orderly pull back that took it just south of $100. While some options trading investors may conclude this is some type of blow off top, others are likely viewing it as a buying opportunity. Those in the latter camp seem to have the superior argument this go around as continued civil unrest in the Middle East may continue to provide an underlying floor to the oil market.

Option traders with the opinion that crude will see higher prices over the next month should consider selling out-of-the-money USO April 38 or 37 Puts on the United States Oil Fund (NYSE: USO). When selling put options, traders bring on the obligation to purchase shares of stock at the strike price. This strategy sets up what could be a win-win scenario. If USO continues to rise as forecasted or even trades sideways, the put options will expire worthless allowing traders to keep the premium received at trade inception.  On the other hand, if USO were to continue dropping in price you may end up having to buy shares of stock. Those that are already willing buyers of USO at current prices can simply look at this as an opportunity to snatch up shares at a lower price.

Find more option analysis and trading ideas at Trading Strategies.

Rather than seeking to capture 100% of the potential profit in the short put play, most experienced option sellers look to close the position after accumulating the majority of the profit. For example, if you sold the USO April 37 Put for 60 cents, you them might buy it back around 10 cents or lower.  With only 10 cents remaining, the reward is simply not worth the potential risk.

United States Oil Fund (NYSE: USO)

Source:  MachTrader

At the time of this writing Tyler Craig owned short puts on the USO.

Follow Tyler Craig on Twitter@TylersTrading.