USO Analysis

Update 4/15/2015: USO's price leaped above resistance today, moving it above the zone of profit in my direction-neutral trade. Shares rose by 7.5% over the seven-day lifespan of the position, or a +390% annual rate. My options spreads produced a -115.0% loss on debit, for a -5,996% annual rate.

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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.

Ranges

Click on chart to enlarge.

USO at 11:20 a.m. New York time, 30 days hourly bars

Implied volatility stands at 46.3%, which is 3.2 times the VIX, a measure of volatility of the S&P 500 index. USO’s volatility stands in the 62nd percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	20.07	21.43	19.18
Lower	17.35	15.99	16.80
Gain/loss	7.3%	14.5%

Implied volatility 1 and 2 standard deviations; chart support and resistance
The Trade

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.

Iron condor short the $18.50 calls and long the $19.50 calls,
short the $17 puts and long the $16 puts
sold for a credit and expiring April 18.
Probability of expiring out-of-the-money

APR	Strike	OTM
Upper	18.5	57.2%
Lower	17	79.3%

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

References

My volatility trading rules can be read here. 

Alerts

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Disclaimer

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



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.