The 1 Easy Trade For Oil’s Resurgence

| November 3, 2017 | 0 Comments

United States Oil ETFWhile it’s clearly been a good year for stock investors, the same can’t be said for every asset class. The commodities sector, for instance, has been a mixed bag. Overall, the performance of commodities as an asset class has been dragged down by energy. In particular, crude oil and natural gas are both down on the year.

Oil is in an interesting place. West Texas Crude is down about 2% this year – but has been moving mostly sideways for about 2 years. It seems like long ago that crude was sitting above $100 a barrel and $4 per gallon gasoline was causing a noticeable drop in the number of drivers on the road.

These days crude is at roughly $50 a barrel, which is actually the upper end of its two-year range. Ironically, it’s a price many experts thought we’d never see again. Oil and gasoline was supposed to only get more and more expensive. Our supply of oil was supposed to be drying up, so to speak.

What happened is essentially the exact opposite. Fracking opened up an ample supply of not just oil, but natural gas. With an abundant supply of domestic natural gas and oil, the price of oil has been steadily under pressure. Moreover, with natural gas at dirt cheap prices, it’s become a popular substitute for oil whenever possible.

Oil is still clearly the world’s most important source of automotive fuel, but that too could soon be changing. Tesla (NASDAQ: TSLA) has proven that electric cars can be both practical and desirable. The new $35,000 Tesla electric car will be hitting the roads soon, and could put even more pressure on gasoline-based cars.

Will crude ever be over $100 per barrel again? Well, forever is a long time. While electric cars will probably be the norm within the next decade, there are still plenty of uses for oil. Diesel is still a popular heavy vehicle fuel, and there isn’t an obvious substitute right now. Petroleum is also an important source for many chemicals, although that alone probably won’t justify a vastly higher price.

Here’s the thing…

At least in the short-term, crude oil prices could be headed higher. The United States Oil ETF (NYSE: USO) has had a less than stellar year, although it has been climbing off its lows for several months. And, at least one big trader believes the most popular oil ETF is headed higher by December 15th expiration.

The trader purchased 10,000 of the December 15th 10.50 calls for $0.40 with the ETF at right around $10.50. Breakeven is at $10.90, and the trader spent $400,000 on this bullish strategy. That’s clearly a large sum of money to bet on oil’s upside with less than two months to go before expiration.

There has been a fair amount of bullish trading occurring in USO options recently, so the smart money may be expecting a short-term rise in the price of oil. While USO isn’t an ideal way to invest in oil, it’s certainly the cheapest and easiest.

USO options

Normally, I’d recommend buying a call spread instead of doing straight up calls. However, with USO options so cheap, I think buying the 10.50 calls is about as good a plan as any if you want to get long crude oil.

There may not be a whole lot of upside in USO in the next two months, but you only need a $0.50 or so move in the ETF to make money. It’s certainly plausible to expect a move like that to occur before the end of the year.


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Category: Options Trading Strategy

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Jay Soloff is an options analyst with Investors Alley.

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