USO Put Options Volume Erupts as Oil Prices Sink

The energy sector is vulnerable to additional losses, making it a prime time to buy puts

Jun 20, 2017 at 12:07 PM
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Put volume has exploded on the United States Oil Fund (USO), as the energy shares sink with oil prices. With July-dated crude futures slumping 3.2% to $42.79 per barrel -- in bear-market territory -- USO is trading down 2.6% at $8.88, fresh off an annual low of $8.83. Against this backdrop, 302,971 put options have traded on USO so far, seven times what's typically seen and with volume on track to settle in the 100th annual percentile. 

Most active are the August 8.50 and 9 puts, where almost 190,800 contracts have collectively traded. Trade-Alert indicates the bulk of the activity is due to one trader selling to close a 40,000-contract block of the 9-strike puts and using the proceeds to fund the purchase of a 70,000-contract block of the 8.50-strike puts. If this is the case, the options trader is hoping to capitalize on continued losses for USO over the next two months by rolling her bearish bet down.

Elsewhere, several symmetrical 25,000-contract lots were exchanged at USO's August 8, 8.50, 9, and 9.50 puts. Considering these blocks went off simultaneously, it's likely at the hands of one trader, though it's hard to tell at this point how they are connected.

More broadly, USO options traders have shown a growing appetite for long puts over calls in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculative players have bought to open 140,009 puts and 114,355 calls over the last 10 sessions. The resultant put/call volume ratio of 1.22 is up from its June 1 reading of 0.77.

However, as Schaeffer's Senior VP of Research Todd Salamone noted in this week's Monday Morning Outlook, the energy sector is vulnerable to additional losses as large speculators slowly unwind their long positions. As such, Salamone says to "avoid the energy group, and/or consider buying puts on energy names to trade around long positions."

Now's affordable time to purchase premium on short-term USO options, too. The energy fund's Schaeffer's Volatility Index (SVI) of 28% ranks in the 15th annual percentile, meaning low volatility expectations are being priced into near-term options -- a potential boon to premium buyers.

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