The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, is down more than 9%, confirming that oil has been one of the year’s worst-performing commodities. Traders should keep an eye on USO and other oil-related exchange traded products with another meeting of the Organization of Petroleum Exporting Countries (OPEC) lurking.
Some oil market observers see more declines coming for crude. Oil traders are concerned over how fast U.S. shale oil producers will increase production to capture the rising prices.
Rig counts have recently ticked higher and with credit and earnings issues improving for some U.S. shale drillers, those companies may seize the opportunity to exploit higher pricing in the near-term.
“One options trader may be hoping OPEC optimism has already priced into USO shares, or they’re betting on a post-event volatility crush,” according to Schaeffer’s Investment Research. “Specifically, two symmetrical blocks of 5,200 June 10 puts and 11 calls traded at the same time earlier, with data from the International Securities Exchange (ISE) confirming sell-to-open activity. As such, it seems safe to assume a short strangle was initiated for an initial net credit of $135,200 ($0.26 premium collected per pair of options * 5,200 contracts * 100 shares per contract).”
OPEC is cutting back to alleviate price pressures, U.S. fracking companies could jump to capitalize on the windfall as crude oil prices jump back above $50 per barrel – according to some estimates, shale oil producers can get by with oil at just over $50 per barrel due to advancements in technology and drilling techniques that have helped cut down costs.
Traders looking to profit from falling oil prices have plenty of ETF options, including the ProShares UltraShort Bloomberg Crude Oil (NYSEArca: SCO), which tries to reflect the two times inverse or -200% daily performance of WTI crude oil, and DB Crude Oil Double Short ETN (NYSEArca: DTO), which also follows a -200% performance of oil.
“The options market is still pricing in relatively low volatility expectations toward short-term USO contracts, though. Not only does its 30-day at-the-money implied volatility of 29.6% rank in the 31st annual percentile, its Schaeffer’s Volatility Index (SVI) of 30% is perched below 80% of all comparable readings taken in the past year. This suggests it’s a better time to buy premium on USO, versus sell it,” according to Schaeffer’s.
For more information on the crude oil market, visit our oil category.