USO Options Signal Has Preceded Oil Tops

The United States Oil Fund (USO) has been in a channel of higher lows since mid-2017, and touched a new two-year high of $14 on April 19, shortly before a tweet from President Donald Trump briefly threw crude futures for a loop. However, USO options are sending up a signal not seen since around the oil price peak in mid-2014, according to Schaeffer's Quantitative Analyst Chris Prybal.

We're talking about the 10-day moving average of USO's put/call skew on 5% out-of-the-money (OOTM) options. As displayed by the red line on the accompanying amcharts chart, this metric -- which compares implied volatility (IV) readings for out-of-the-money puts against that of their call counterparts -- fell to nearly 1.0 last week. This was the lowest such reading since the June 2014 peak in oil prices, marking a dramatic drop from nearly four-year highs earlier this year.

Below is a monthly chart of USO since inception, with markers around the times the exchange-traded fund's (ETF) OOTM put/call skew dropped by 15% in 50 sessions. The last time we saw such a sharp plunge was in May 2014, just before the aforementioned crude peak. In fact, going back to 2006 -- when USO began trading -- there have been just five other signals, and two of those were in early 2008, just before the July 2008 peak in oil prices. The others also roughly corresponded to USO tops.

Here are the USO post-signal returns broken down, as well as the fund's anytime returns. In a nutshell, the ETF tends to outperform two months after an options signal, averaging a gain of 4.9% and higher 80% of the time. That's compared to an average anytime two-month loss of 0.8%, with a win rate of just 53%. However, once you get out six months, it tends to be downhill for USO. The fund was higher just 20% of the time six months and a year after signals, averaging much steeper-than-usual losses of 18.7% and 36.6%, respectively.

So, is another oil top on the horizon later this year? History certainly isn't on the side of oil bulls, as far as the aforementioned options data is concerned. What's more, Prybal points out that long oil positions among large speculators are near an extreme right now, per Commitments of Traders (CoT) data. An abundance of bullish crude positions was also the case back in June 2014 -- and we've found, more often than not, this group to be a fairly reliable contrarian indicator.