How can we use implied volatility as a tool to signal a directional play?  

Crude oil futures continue to trade north of the $105 level due largely to the unrest in Iraq and possible escalation across the entire oil-producing region.  Fear has been a major driving force behind prices. If the Iraqi army and perhaps even its Western allies are able to suppress the ISIS rebels, we could see a good chunk of this fear premium dissipate.  

Should this indeed happen we then have to lean on the fundamentals of the crude market to base our opinions. The supply of crude oil in the U.S. and abroad is very ample at the present time. China has significantly bolstered its emergency reserves of crude oil to 246.2 million barrels, which is the highest level since inventories began being tracked in January 2010.  

This is all bearish for Crude in tone.  What does the VIX tell us?  It is true that VIX spiked as high as 12.89 since the situation in the Mid-East began. It’s now trading 11.60.  IV in USO certainly spiked as well from 14.6 on 6/10 up to 19.08 the next day.  It’s now trading 17.85.  Hardly a panicked  reaction.  In short, the market is saying “who cares”?  Given these analyses, one way to take advantage of this set up is to purchase an USO August 38 Put for $0.40.

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