The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate oil futures, has traded sharply higher over the past month and some traders have been piling into long oil futures positions, but USO has retreated in recent sessions and that could be the spark behind an obviously bearish options bet against the heavily traded oil ETF.
“On Wednesday, one trader bet more than $5 million that the US Oil Fund ETF (USO) would fall back to all-time lows. Specifically, the trader bought more than 80,000 November 13.5-strike put options for $0.65 each. This is a bet that USO falls below $12.85 by November expiration, an 11 percent decline from where USO traded on Wednesday morning,” reports CNBC.
USO has been somewhat steady following a sharp reversal last month that forced a spate of short covering. A short position is a sale on a borrowed security. The investor needs to eventually return the borrowed stock by purchasing it back from the open market. If the price falls, the investor buys it back for less than he or she sold it for and pockets the profit. [Widening Contango Could Cut Into Popular Oil ETF’s Returns]
“Money managers’ net-long position in West Texas Intermediate rose by 14,821 contracts to 147,678 futures and options in the week ended Sept. 15, according to data from the Commodity Futures Trading Commission. That’s the highest level since July 7. In contrast, traders curbed their bullish positions in European benchmark Brent by the most in a month,” reports Dan Murtaugh for Bloomberg.
Although professional traders are scurrying to oil futures contracts, some traders have recently departed USO with the ETF lighter by $304.3 million this month through Sept. 18.
Investors should be careful of getting caught up in oil’s recent strength because the commodity is still in a bear market and expectations for a significant recovery are muted. Looking ahead, we may be in for low oil prices for much longer than many anticipated. The Organization of Petroleum Exporting Countries, or OPEC, projects oil prices will rise by no more than $5 per barrel per year and will eventually reach $80 per barrel by 2020 or $100 per barrel by 2030 to 2040, Reuters reports.
The aforementioned options against USO would only be profitable if the ETF fell far below $13, according to CNBC. USO closed at $14.59 yesterday.
United States Oil Fund
