Buying A Call Option On United States Oil $USO

| August 14, 2015 | 0 Comments

oilBuying A Call Option On United States Oil $USO

Crude oil is once again making headlines as it plunges towards the $40 per barrel mark.  The world’s most popular commodity has dropped 20% over the past month and has everyone trying to pick a bottom.

Is a drop in the price of oil good for the economy?  Is it bad?  It’s actually a little of both, depending on perspective.  Overall, it’s probably a good thing for the US economy since we tend to use a lot more of the commodity than we export.

One of the most popular ways to trade crude oil is through the United States Oil ETF $USO.

$USO is a heavily traded ETF which tracks the price of crude oil.  The fund trades about 20 million shares per day.  Even though commodity ETFs have their issues, trading them is still the easiest (and cheapest) way to buy and sell commodities.

Currently, $USO is trading at $14.07.  That’s 61% from the 52-week high and already 2% below the previous 52-week low.  The ETF is down 29% on the year so far.

So is now the time to buy a call option on $USO?

As a reminder, a call option makes money when the underlying stock goes up.  Has $USO finally found a bottom?

For a more in-depth look at this widely traded oil ETF, you can click the link.

Here’s the deal…

The price of crude oil is getting hit again for the same reasons as always.  There’s simply a lot more supply than demand.   Recent refinery outages in the US have resulted in the country’s stockpiles growing even bigger.   And, there’s no reason to believe the glut is going to end anytime soon.

China and other emerging markets aren’t seeing enough economic growth to increase demand for oil.  It’s more like the opposite.  Without a rise in global demand, oil producers are basically just adding to stockpiles whenever they get a new barrel of oil from the ground.

Here’s the chart of $USO:

call option buying opportunity, a chart of $USO

As you can see above, the ETF has plummeted this year.  First there was the great oil decline of 2014.  Now, crude oil is falling once again – this time to new lows of the year.  The price of USO is well below the 50-day moving average.

Now could be a great time to buy an $USO call option

Despite all the negative news regarding oil, this may actually be a great time to buy a call.  Well, at least it’s a great time to buy a long-term call.  The supply/demand fundamentals are too bearish right now to expect a quick rebound.

However, the entire trading world seems to be bearish on oil.  That’s generally a sign the bottom is nearing.  Eventually, oil producers are going to have to shut down or slow excess oil production or risk going out of business.  This will lead to lower supply in the long-run.

Given the fundamentals of the situation and the look-term outlook, I recommend buying a long-term $USO call in this situation.  The January 2017 15 calls are trading around $2.25.  That looks like a good price for an option within a dollar of being in the money, and still has 17 months until expiration.

Yours in Profit,

Gordon Lewis

Note: Gordon Lewis has been trading options for more than 15 years and he now writes and edits for Optionstradingresearch.com.  You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.

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Category: Call Or Put Options?

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.

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