The oil market has been entertaining participants with its own warped version of Mr. Toad’s Wild Ride.
And that’s a good thing for tactical traders.
Elevated volatility, especially when its two-sided, brings all sorts of opportunity in its wake. It allows for quicker profit-taking for those brave enough to buy weakness and sell strength.
In the end, this means you can capture greater profits versus during low volatility periods when it takes many weeks for price targets to be reached.
What’s more, the increased uncertainty has inflated option premiums in oil related stocks and ETFs, making it much more lucrative for option selling strategies.
Here’s an impressive stat to chew on: the United States Oil Fund LP (ETF) (NYSEARCA:USO) has delivered six separate 10% swings in the past two and a half months alone.
Traders who have ridden the waves have enjoyed fast profits and quick re-entry opportunities.
USO Short Puts
Oil prices have seen a bout of profit-taking over the past three days, bringing the USO ETF into an attractive buy zone. With option premiums still juiced up, consider selling the May $17 puts for 54 cents.
The maximum reward is limited to the initial 54 cents and will be captured if USO remains above $17 by May expiration. To accelerate your profit accumulation, however, consider exiting once you’ve captured 50% of the maximum reward if you can grab it in the next week or two.
Then you can re-enter some type of short put play on the next USO price drop.
Keep in mind by selling the May $17 put you obligate yourself to buy 100 shares of USO at $17 if the put sits in-the-money at expiration. To avoid assignment you can simply exit the trade prior to expiration if USO falls below $17.
At the time of this writing Tyler Craig owned short puts and calls on USO.
