Call Buyers Cash Out as USO Heads Toward Best Week Since July

Most options traders are bearish on USO, though

Apr 12, 2018 at 11:49 AM
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Rising tension in the Middle East has helped boost crude oil prices this week, with black gold topping out at a three-year high in Wednesday's trading. Shares of the United States Oil Fund (USO) also hit a notable milestone yesterday, touching $13.59 for the first time since November 2015 -- prompting a number of options traders to liquidate their in-the-money calls.

By the numbers, roughly 117,000 USO call options changed hands on Wednesday, nearly three times the average daily amount. Almost half of the volume was centered at the April 13.50 call. While several mid-sized blocks were apparently sold to close, one notable trade occurred when a speculator rolled these long front-month bets up and out to the October 16 call. The last time USO shares traded north of $16 was in October 2015.

More broadly, options traders are more bearish in the front-month series. Peak open interest for the energy exchange-traded fund (ETF) is found at the April 11.50 and 12 puts, where more than 311,500 contracts collectively reside. Data from the major options exchanges confirms significant buy-to-open activity at each strike in late January, when the shares were trading around $13.

Amid the fund's recent rally, though, bearish options prices have imploded. At last check, USO's 30-day implied volatility skew of negative 2.5% is ranked in the 1st annual percentile, meaning put options are pricing in remarkably low volatility expectations compared to their call counterparts.

Looking closer at the charts, USO is up 7% week-to-date so far -- pacing for its best week since late July. This surge has helped the energy shares break free from recent resistance in the $13.20 region, home to its 10% year-to-date return.

And while the shares are trading down 0.4% today at $13.39 after a tweet from President Donald Trump eased worries of a potential military strike against Syria following last weekend's alleged chemical attack, this former ceiling could now switch to a more supportive role, while just below here is the ETF's 80-day moving average. This rising trendline has served as a springboard for USO since February.

uso price chart april 12


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