The price action in crude oil continues to impress. Bulls have begun courting the beaten-down commodity and finally — finally! — are having some success.
One of the beauties of chart reading is the ease with which a behavioral shift can be spotted. Up until February, crude oil — as measured by the United States Oil Fund LP (ETF) (NYSEARCA:USO) — was locked in a death spiral with nary a whimper of strength.
Post-February, however, things are a-changin’.
The last two drops in USO were bought by an increasingly aggressive cohort of dip buyers. Their efforts have succeeded in establishing a trading range. Though volatility remains elevated, the recent pair of higher pivot lows was sufficient to turn the 20-day moving average higher.
Sure, a rising 20-day MA isn’t that big of a deal, but given that it hasn’t happened in the USO ETF since the oil bloodbath began eight months ago, it’s worth mentioning.
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While much works remains before the longer-term downtrend in crude oil is reversed, the bulls have at least established a foothold.
The implied volatility for USO options has come in a little bit since highlighting it in USO ETF: Oil Volatility is Gushing. And yet, it remains elevated enough to focus on premium selling strategies.
USO ETF Naked Puts
Selling naked puts in USO remains my favorite strategy for a bullish bet. The cheap price tag of the oil ETF keeps the margin requirement extremely low. This allows us to generate an impressive return. And even traders with a smaller account size can play along.
For example, if I can sell an out-of-the-money put for $50 and the initial margin requirement is only $250, I have a potential 20% return with a very high probability of profit.
Keep in mind the margin requirement will increase if USO falls in price over the duration of the trade.
Use any kind of pullback in USO in the coming days as an opportunity to short March puts. I’m eying the March $17 puts, which currently are trading for around 42 cents. Consider it a bet that USO remains above $17 by expiration. If we can get a decent drop in the price of USO, the puts should rise to 50 cents — a price I would consider selling them at.
The max reward will be limited to the initial 50-cent credit. By selling the put, lyou obligate yourself to buy 100 units of USO at $17 if assigned. Those unwilling to buy shares could simply close the trade if USO falls below $17.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
