Tuesday, September 1, 2015

USO Analysis

Update 9/1/2015: I was unable to have my order filled at  a high enough premium to meet my needs. I've cancelled the trade and instead taken on exposure the energy sector by opening a position in another symbol. See "XOP Analysis".

The United States Oil Fund (USO), which tracks the spot price of crude oil delivered at Cushing, Oklahoma, rose 22% over three days through Monday. The movement came amid implied volatility that has been rising since late June.

I am considering USO as a pure volatility play, on the assumption that at some point prices will stabilize and volatility will revert to the mean.


I shall use the SEP series of options, which trades for the last time 45 days hence, on Oct. 16.


Click on chart to enlarge.
USO at 10:55 a.m. New York time, 90 days 2-hour bars
Implied volatility stands at 58.8%, which is 1.9 times the VIX, a measure of volatility of the S&P 500 index. USO’s volatility stands in the 91st percentile of its most recent rise.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%ChartEarns
Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move

The Trade

Iron condor, short the $17.50 calls and long the $18.50- calls,
short the $12 puts and long the $11 puts,
sold for a credit and expiring Oct. 17.
Probability of expiring out-of-the-money


The premium is $0.25, which is about a quarter of the width of the position’s wings.The stock at the time of analysis was priced at $15.10.

The risk/reward ratio is 2.8:1.

The zone of profit in the proposed trade covers a $2.50 move either way, or 3.6 times the average true range.

Decision for My Account

I'm attempting a position on USO as described above but have been unable to get to good fill. I'll keep the order alive and update this analysis later today.

Cancelled the trade. See the update at the top.

-- Tim Bovee, Portland, Oregon, Sept. 1, 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.

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Based on a work at www.timbovee.com.

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