Trade the Oil Gush With United States Oil Fund

Advertisement

One silver lining to last week’s plunge – and the silver lining to every market swoon — is the revelation of which assets the Street really loves. While equities were playing limbo, crude oil was flying high seemingly unaffected by the trade war tantrum. And that’s making trades on the United States Oil Fund (NYSEARCA:USO) an attractive proposition right now.

At $66, crude futures are knocking on the door of a potential breakout. Last week’s rally lifted the commodity back to its prior peak, climbing above its 50-day and 20-day moving averages in the process. While some backing and filling may be in order before resistance can be taken out, black gold is a buy into any weakness.

The logic is simple – if oil was able to remain firm during last week’s meltdown, then it should be able to weather just about any storms that strike over the next few weeks.

Source: OptionsAnalytix

USO provides a direct route to play crude oil for traders that don’t want to dabble in the futures market. It’s an ETF that owns oil futures and thus moves tit for tat with crude, at least in the short run.

Over the long haul, USO will lag the performance of crude due to the term structure of the futures market. But, for today’s one-month trade idea, USO should do the trick.

USO Naked Puts

The recent rally breathed new life into USO options. The uptick in demand lifted the fund’s implied volatility rank to 58% which means option premiums are officially trading rich. To capitalize, we suggest selling the May $12.50 puts for 23 cents. Consider it a bet that USO sits above $12.50 at May expiration. If it does, you will capture the max reward of $23 per contract.

While that may not sound like a lot, the initial margin requirement should be less than $200, so we’re talking about a return on investment north of 10%. That’s not bad for a high probability trade like this.

By selling the put, you are obligated to buy 100 shares of USO per contract at an effective purchase price of $12.37. If you want to sidestep assignment, then buy back the put if it’s in-the-money near expiration.

As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.

For a free trial to the best trading community on the planet and Tyler’s current home, click here!


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/trade-the-oil-gush-with-united-states-oil-fund-lp-etf-uso/.

©2024 InvestorPlace Media, LLC