Breaking down a long straddle on USO
Ahead of today's weekly crude inventories report, which showed a bigger-than-expected drop in domestic oil supplies, one options trader placed a big bet on the United States Oil Fund (USO). Specifically, it looks like the investor forked over seven figures to speculate on a massive move for the oil exchange-traded fund (ETF) by January.
At last check, USO has seen 42,000 calls and 37,000 puts cross the tape, exceeding its average intraday volume of roughly 22,000 calls and 26,000 puts. Most of the action transpired at the January 2020 11.50 strike, where symmetrical blocks of 30,000 calls and puts traded out of the gate. It seems the trader bought the calls for $1.15 each, and the puts for $0.78, resulting in a net debit of $1.93 per spread, or $5.79 million total ($1.93 x 100 shares per contract x 30,000 spreads).
There are two ways the long straddle can profit: if USO rallies above $13.43 (strike + premium paid) or falls below $9.57 (strike - premium paid) before the options expire on Friday, Jan. 17. The further the shares move beyond those breakeven rails, the more money the trader stands to make. However, should the ETF land right at $11.50 when January options expire. the investor will lose the entire $5.79 million.
Looking at the charts, the oil fund will need to break out of its recent trading range -- and head for new 2019 highs or lows -- in order for the straddle to profit. Since gapping lower in mid-May, USO has bounced around between support in the $10.50 region and resistance at $12.60. At last check, the ETF was up 0.3% at $11.66.
