The United States Oil Fund LP (USO), which tracks West Texas intermediate crude oil traded on the New York Mercantile Exchange, broke above its 20-day price channel on Tuesday, producing a bull signal.
USO has completed three bull signals in the past year. Two were unsuccessful, producing a success rate of 33.3% with an average loss of 7.7%. Those odds make it a candidate for a direction-neutral strategy.
The current near-term options series are the Monthly APR series, which trades for the last time on April 17, nine days hence.
[USO in Wikipedia]USO
The goal of my trade is to construct a direction-neutral position with a zone of profitability at expiration covering all of the one standard deviation range implied by volatility and options pricing, or the 30-day hourly chart support and resistance range, whichever is wider.
Click on chart to enlarge.
|USO at 11:20 a.m. New York time, 30 days hourly bars|
|Week||SD1 68.2%||SD2 95%||Chart|
The sharp price decline suggests extending the zone of profit downward at the expense of the upside. The proposed trade gives up $1.18 at the top of the chart range but provides 35 cents of coverage below the one standard deviation range and within 20 cents of the lower boundary of the chart range.
short the $17 puts and long the $16 puts
sold for a credit and expiring April 18.
Probability of expiring out-of-the-money
The risk/reward ratio stands at 3:2. The premium is 40 cents (31 cents for the calls and 9 cents for the puts).
Decision for My Account
I've opened a position on USO as described above.
-- Tim Bovee, Portland, Oregon, April 8, 2015
My volatility trading rules can be read here.
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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.License
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