Option Traders See Record Lows for United States Oil Fund (USO)

Options traders are expecting United States Oil Fund LP (ETF) (USO) to breach $8 within the next couple of weeks

by Andrea Kramer

Published on Feb 2, 2016 at 11:24 AM

Oil futures are swimming in red ink today, dragging stocks lower. Likewise, an ugly earnings report from one big-cap oil name isn't doing the energy sector any favors. Meanwhile, the United States Oil Fund LP (ETF) (USO) -- an exchange-traded fund (ETF) that tracks crude futures -- is down 4% at $8.66, and has lost more than 50% during the past year. What's more, it looks like some option buyers are betting on record lows for the ETF in the near term.

USO options volume is running just above expected intraday levels, and its 30-day at-the-money implied volatility just hit an annual high of 64.7%. Most active is the weekly 2/12 8-strike put, where nearly 11,000 contracts have changed hands. It looks like most of the volume has transpired on the ask side, hinting at buy-to-open action. By purchasing the puts to open, the buyers expect USO to breach $8 by the close on Friday, Feb. 12, when the weekly options expire.

However, USO calls have been the options of choice during the past few weeks. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the ETF's 50-day call/put volume ratio of 1.30 stands higher than 88% of all other readings from the past year. However, considering short interest on the ETF surged more than 35% during the most recent reporting period, some of that call buying -- particularly at out-of-the-money strikes -- could've been short sellers looking for a hedge.

Meanwhile, although United States Oil Fund LP (ETF) (USO) put volume hit an annual high on Jan. 22 -- just two days after the fund touched an all-time low of $7.92 -- much of that was attributable to sell-to-open action at the March 7.50 and April 7 puts. As long as the sold puts stay out of the money -- meaning USO stays north of the strikes through their respective expiration dates -- the sellers can pocket the initial premium received.

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