DailyPlay – Conditional Opening Trade (USO) – November 22, 2022

USO Conditional Bullish Opening Trades

View USO Trade

Strategy Details

Strategy: Short Put Vertical Spread

Direction: Bullish

Details: Sell to Open 15 Contracts Dec. 9th $67/$65 Put Vertical Spreads @ $0.62 Credit.

Total Risk: This trade has a max risk of $2,070 (15 Contracts x $138).

Counter Trend Signal: This is a Bullish trade on a stock that is experiencing a bearish trend.

1M/6M Trends: Bearish/Bearish

Technical Score: 3/10

OptionsPlay Score: 91

Entering the Trade

Use the following details to enter the trade on your trading platform. Please note that if there is a multi-leg option strategy, it should be entered as a single trade. 

Please note that this is a CONDITIONAL trade. We will only enter the trade when the condition is met, which is IF USO trades towards the $66.70 and $67.50 range. Also note that the cost basis, premium paid, as well as the number of contracts when we open this trade will therefore be different from what we post today. This condition is only valid until Friday this week.

Investment Rationale

China announcing some significant Covid cases and return to lockdown was not taken well by investors yesterday, though by the close we only saw the SPX fall 39 bps., but the NDX lost 1.06%. Crude oil made an early real decline on news that Saudi Arabia and OPEC+ were going to increase production, sending WTI down almost $5. Then headlines came out that they denied ever saying that, and crude reversed to settle at $80.04/bbl., just 7 cents lower on the day. (This is part of the reason why I both love and hate trading the crude oil market.)

In Monday’s Technical Outlook webinar, we talked a fair amount about the oil market, and that if one were going to use the US Oil Fund ETF (USO) to play the oil market, that one need especially understand that this ETF does not track the front-month price of WTI oil like you see quoted on your TV, but a weighted average of futures contracts going out a full year from that front-month, whereby the front-month’s weighting is only 15% of the total ETF price calculation. That means you can see oil show a higher quote on the day, but the USO actually have a negative move for that day because the back months in oil were trading lower that particular day. (This is what the whole spread market is about in futures markets, as in playing one month vs. another instead of trying to simply directionally bet on the price of a commodity.)

Now that I’ve explained that to you, I do think yesterday’s decline and then upmove had to wash out some shorts, and thus, maybe a near-term trading low was made. When I look more closely at where USO saw its heavy volume – and where it didn’t – I can get a clue into where within yesterday’s range players made the bulk of their bets. What I see is that from $67.10 +/- 40 cents, hardly anything traded relative to just about everywhere else in Monday’s range. That low-volume area often acts as a support or resistance level, and as such, if we see USO trade down to that level anytime between now and Friday’s close, we will look to sell the USO Dec. 9th $67/65 put spread for what is the then current bid/offer spread mid-price. Right now, the ATM/ $2 OTM put spread yields about 40% of the strike differential, a number I am usually very comfortable selling a credit spread for. I suspect we should get something like that same 40% credit-to-strike differential if we get a chance to buy this on a pullback into that range around $67.10.

USO – Daily

Next, please note as a general rule – and unless I state otherwise in a DP write-up – assume any conditional trade is good to enter for up to one week after I write the recommendation.

We do have an open conditional trade in LOW, which was to short a Dec. 9th $200/$190 put spread if we saw a pullback to near $200. (The low since I put that recommendation out on 11/16 has been $205.37.) I will adjust this recommendation to instead wait to put on a Dec. 16th $195/$185 put spread if the $195 area comes into play in the underlying stock (and not do the $200/$190 put spread). Note: I’ve also changed the expiration by a week.

LOW – Daily