Bearish Option Bets Build on Oil Ahead of OPEC Summit

USO and XOP put options are in high demand ahead of tomorrow's OPEC meeting

Nov 29, 2016 at 11:20 AM
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Ahead of tomorrow's Organization of the Petroleum Exporting Countries (OPEC) meeting in Vienna, crude oil prices are pulling back. Weighing on liquid gold is rising skepticism toward a production freeze, bolstered by comments from Iran's oil minister. Meanwhile, options traders have recently expressed their doubts about a potential output cut, via bearish bets on the United States Oil Fund LP ETF (USO) and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

At last check, USO was 3.4% lower at $10.09. This should please a group of option bears who are active today. In particular, the December 9.50 put is one of the most active USO strikes today -- with 31,869 contracts traded -- and it looks like some of this activity could be of the buy-to-open kind. If this is the case, the goal for call buyers is for the exchange-traded fund (ETF) to drop below $9.50 by the close on Friday, Dec. 16, when the front-month options expire.

It's hard to argue with these doubters. The United States Oil Fund LP ETF has repeatedly failed to maintain any positive upside momentum, recently getting rejected by its 320-day moving average. And, year-to-date, the equity has surrendered over 8% of its value.

Meanwhile, XOP puts account for 78% of the ETF's total intraday options volume. It looks like one trader may have initiated a long put spread with the December 32 and 36 strikes. In this case, the spread trader expects XOP to descend to $32 by front-month options expiration.

Bearish betting is business as usual for XOP. During the past two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open three times as many put options as calls. Likewise, the ETF's Schaeffer's put/call open interest ratio (SOIR) is a top-heavy 3.14, registering just 2 percentage points from a 52-week high.

Like its aforementioned counterpart, the SPDR S&P Oil & Gas Exploration & Production ETF is struggling today, down 2.1% at $37.51. However, from a longer-term perspective, it's much better off. Specifically, XOP has advanced more than 24% on a year-to-date basis, and hit an annual high of $40.27 as recently as last week.

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