Fire Sale on Oil Fund Options

January tends to be the worst month of the year for USO

Andrea Kramer
Dec 19, 2017 at 2:33 PM
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The United States Oil Fund (USO) has spent the better part of two years retreating from resistance in the $12 neighborhood, as founder and CEO Bernie Schaeffer noted earlier this month. What's more, if recent history is any indicator, USO shares could start 2018 with a whimper -- and short-term options traders can speculate on the oil fund at a bargain.

The exchange-traded fund's (ETF) current annual high stands squarely at $12.00, last touched on Jan. 3, and this strike is also home to peak call open interest in the front-month January 2018 series of options. This abundance of calls overhead could act as an added layer of options-related resistance in the near term.

USO oil etf chart

Of all the ETFs that we track, USO has performed the worst in the month of January, historically. Since inception, the fund has lost an average of 5.2% in the first month of the year, according to data from Schaeffer's Quantitative Analyst Chris Prybal. At last check, USO is up 0.6% at $11.50; another 5.2% drop from current levels would place the ETF around $10.90.

For speculators expecting more short-term downside, now is an opportune time to scoop up options on the oil fund. Specifically, the ETF's Schaeffer's Volatility Index (SVI) of 17% is at its lowest point of the past year, pointing to relatively muted volatility expectations -- and, thus, attractive near-term option premiums right now.

However, it's worth noting that the February-to-April period is historically bullish for USO. The ETF has averaged gains of 2.2%, 1.8%, and 4.3%, respectively, since inception, with April marking its best month of the year. Plus, the expiration of several January 2018 calls -- including the aforementioned peak call open interest at the key 12 strike -- over the next month could clear an options-centered hurdle for USO, should it try again to surmount the $12 level. So, for speculators looking to bet on more near-term downside for USO, timing will be very important, if past is prologue.


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