Oil Drop Offers a Short Put Shot in ETF

Garner premium and prep to buy USO at lower price

The recent bout of selling in the marketplace hasn’t been isolated to equities. The U.S. Oil Fund(NYSE: USO), SPDR Gold Trust (NYSE: GLD), and to a lesser extent iShares Silver Trust (NYSE:SLV) have also experienced some downward pressure over the past few trading sessions.

Of the three, the USO has been the worst performer dropping as much as 6.5% in this short span. Given the rapid rise in crude oil from $103 to $113 it’s not all that surprising to see some selling finally come into this overextended space. Like the short-lived pullback in the middle of March, the current sell-off may present yet another opportunity to sell put options.

By selling a put option, sometimes called a naked put, option trading investors obligate themselves to buy shares of the underlying at the strike price. When selling out-of-the-money put options traders are faced with an intriguing proposition. If the stock moves up or sideways the puts remain out-of-the-money and decline in value over time allowing the ability to buy them back at cheaper prices to lock in a profit. If the stock drops far enough to push the put option in-the-money the trader will be obligated to purchase the stock. That may or may not necessarily be a bad outcome. Instead of placing a limit order to purchase USO in the $39 area, selling the USO May 39 Putessentially accomplishes the same outcome while allowing you to get paid a small premium in the process.

Traders seeking bullish exposure in the oil patch may consider selling the USO May 40 puts in the coming days. I suggest waiting for some type of short term bottom to form before entering the position. We may yet have a few days of selling before all the weak hands are flushed out.

Check with your broker whether your account allows for the naked selling of options. Due to the risk some brokers limit the types of accounts that conduct these types of trades.

U.S. Oil Fund ETF (NYSE: USO)