Options Traders Circle USO, XOP as Crude Oil Tanks

United States Oil Fund (USO) and SPDR S&P Oil & Gas Exploration & Production ETF (XOP) are attracting options traders as oil prices drop

Mar 14, 2017 at 12:06 PM
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Crude oil prices are on pace for a seventh straight loss, after the Organization of the Petroleum Exporting Countries (OPEC) said oil inventories continue to rise, despite efforts to curb production. Against this backdrop, the shares of United States Oil Fund (USO) and SPDR S&P Oil & Gas Exploration & Production ETF (XOP) are testing key chart levels, and garnering quite a bit of attention from options traders.

USO Struggles to Stay Above $10

USO has given up more than 10.5% in the past week alone, last seen 2% lower at $10.08. The exchange-traded fund (ETF) gave up recent support in the $11.30 area -- a 23.6% Fibonacci retracement of its 2016 low to high -- and is now testing the round $10 level, which represents a 50% Fibonacci retracement of last year's rally.

USO oil etf chart today


USO Options Traders Ramp Up Bearish Betting

Amid ramping concerns about crude oversupply, options traders have scooped up USO puts over calls at a near annual-high clip during the past two weeks on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). In fact, the ETF's 10-day put/call volume ratio on the exchanges is 2.18 -- higher than 95% of all others from the past year -- and put volume touched a 52-week peak on March 8.

Plus, USO's front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR) of 1.79 indicates that near-the-money puts outweigh calls by a nearly 2-to-1 margin in the March series of options. However, the longer-dated May and June 10 puts have seen the most additions during the past two weeks, with roughly 42,000 and 87,000 contracts added, respectively. The majority of the puts were bought to open, suggesting speculators were either betting on or hedging against USO dropping into single-digit territory in the next few months. 

In today's trading, USO options are crossing at more than two times the average intraday pace, with puts outpacing calls, 74,000 to 48,000. It appears some kind of spread activity may be happening at the April 10 put -- most active by a mile, with nearly 29,000 contracts exchanged -- and the April 10.50 put. 

XOP Drops to Former Speed Bump On the Charts

In similar fashion, XOP has surrendered 6.1% in the past week, and was last seen 3% lower at $35.28. The ETF effectively blew through potential support at its 200-day moving average -- a trendline that served as a foothold in mid-2016 -- and is now trading in the $34.75-$36 area. This region acted as a speed bump in mid-2016, and is now home to XOP's 320-day moving average -- which contained the fourth-quarter pullback -- and represents a 38.2% Fibonacci retracement of the ETF's 2016 low to high.

XOP oil etf chart today


Sentiment Shift Among XOP Options Traders

Unlike USO, though, XOP has seen options traders pick up long calls over puts at a faster-than-usual rate. On the ISE, CBOE, and PHLX, the ETF's 10-day call/put volume ratio of 0.77 is higher than 79% of all other readings from the past year. Further, XOP's SOIR is docked at an annual low of 1.24, indicating near-term options traders have never been more call-heavy in the past year.

The March 40 and April 40 calls have garnered quite a bit of attention, with about 25,000 and 61,000 contracts added, respectively, in the past two weeks. While a good majority of the front-month calls were bought to open, the April 40 calls saw a healthy mix of buy- and sell-to-open activity. The March 40 call is now home to peak open interest in the front-month series, with more than 102,000 contracts outstanding.

It's worth noting, though, that short interest on XOP jumped 11.7% during the past two reporting periods. These bearish bets represent nearly a week's worth of pent-up buying demand, at XOP's average pace of trading. As such, it's possible that some of the recent out-of-the-money call buying could be attributable to shorts seeking an options hedge.

In today's trading, it's puts that are outnumbering calls -- nearly 7-to-1, with roughly 238,000 puts and 35,000 calls exchanged so far. That's roughly six times XOP's average intraday put activity. Accounting for a hefty portion of this activity, it appears one trader bought to open 80,000 June 33 puts, while simultaneously selling to close large blocks of March 34 and June 37 puts, according to Trade-Alert. It also seems some speculators may be buying to open the April 33 put, which would move into the money if XOP breaches $33 in the next few weeks.

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