Nice Reward, Low Risk

The implosion of the crude-oil markets over the past few months has been one of the biggest news stories on just about every financial-news channel.  The speed and magnitude of the move made USO a very difficult trade, if you were not already short before the drop. There really was no pullback the entire time and good luck trying to find the bottom for that falling knife. 

Thankfully, though, USO, for whatever reason has found a nice trading range roughly defined between $18.00 and $20.00.  Until this range is rejected, we have some nice opportunities to play this range. 

I like to play these trades with a two week time horizon.

  • Given the implied volatility going out two weeks at 49.9% we can calculate that a one standard deviation move is +/- 9.75% or +/- $1.75 in underlying price. 
  • So, if we get down to $18 or up to $20 we can employ a vertical spread. 
  • I prefer to take the debit side of these trades, as I will be paid odds to take the position something will happen, as opposed to thinking something won’t happen.  So, if we get down to $18 I would be targeting the $19.75 area and would employ the 19/19.5 call spread which could be purchased for approximately $0.15 offering me odds of 2.33:1 odds. 
  • Or if we trade up to $20 I would be targeting the $18.25 area.  The 18.5/19 put spread can be purchased for even less than the call spread for about $0.12 offering me odds of 3.167:1! 

Nice reward, low risk.

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