Oil volatility is creating a ‘win-win’ trade strategy
Oil prices rose after President Donald Trump resumed the blockade of the Strait of Hormuz. The move follows the latest round of attacks between Iran and the United States over the weekend. Volatility creates a unique opportunity in the options market.
United States Oil Fund (USO)The ETF that best tracks oil prices offers stock option investors a liquid, accessible alternative to the complexities of the futures market. While uncertainty in the Gulf may create volatility in the short term, long-term crude oil is also likely to face structural upward resistance, providing an ideal environment for premium sellers looking to take advantage of higher option prices.
On the downside, the structural backdrop continues as protracted conflicts in the Middle East continue to strain global oil supply chains and disrupt transit routes. Compounding this stark physical reality is the status of the US Strategic Petroleum Reserve (SPR). Following major declines by the Biden administration ahead of the 2022 midterm elections, the SPR was already at decades-lows before the Trump administration further depleted the SPR to offset Iran’s crackdown on oil from the Persian Gulf during the last war. The SPR evolved from a political tool to suppress prices into a major backstop against sharp declines in crude oil prices as the government needed to replenish the reserve rather than deplete it further.
Conversely, the rise may also face some resistance as the US continues to pump record levels of crude oil and OPEC+ provides a major structural counterbalance to supply cuts. Looking further ahead, the temporary, long-term rebound of Venezuelan supply promises to add more barrels to global balances in the coming years. Economic fluctuations continue on the demand side. China’s multi-year slowdown, combined with a steady and sustained shift towards alternative energy sources, continues to blunt long-term demand and has fundamentally changed global consumption forecasts.
In other words, oil prices may remain in a range for a while, which is great for short-term premium strategies.
With oil stuck between the SPR-supported floor and the supply-weighted ceiling, implied volatility has risen well above historical averages. This premium expansion is perfectly set up to target downsides by making a sale cash secured sales.
Selling cash-covered non-cash puts allows investors to benefit from higher implied volatility without assuming the upside risk of the call spread, especially in an environment where structural supply caps make an uncontrolled rise unlikely. By insuring downside insurance that the market is currently overpriced, you get an accelerating premium through lost time (theta) over the next two months.
United States Petroleum Fund, YTD
For USO, the app targets ~30 delta strikes approximately 45-60 days before expiration. This positioning places the strike well below the current market price, deep within the safety net provided by the depleted SPR and geopolitical supply constraints.
If USO remains in the range or rises over the next 6-8 weeks, the put option will lose value quickly, allowing the trader to buy it back cheaply or have it expire worthless for maximum profit. If a macro slowdown temporarily pushes oil lower, the higher premium collected will lower the effective breakeven point, leaving the trader well positioned to defend his position or take delivery of USO shares at a significant discount.
As I write this, an investor can sell $100 worth of weekly USO for $2.40 on August 28th. Collect more than 18% annualized or purchase USO at a 10% discount. If one “sells” the stock (i.e., is “assigned” to the short option and is forced to purchase the ETF at the strike price), one can consistently reduce one’s effective cost basis by selling covered calls against the resulting position, as long as implied volatility remains above average.
If USO stays here, you will collect the full premium. If it rises, you still collect the premium. Even if it actually falls, you won’t see a loss until USO falls below $97.60 by a margin greater than the premium collected, in this case. So in other words, it’s a trade that makes money whether the USO goes up, down, or is nowhere. A win-win scenario.
trade breakdown
- Sell August for $100 per week on August 28, put for $2.40
- Maximum winnings $240
- Maximum loss $97.60
- Skill level: Medium
