Here's How To Gauge USO Volatility

After another rollercoaster session Monday, ES futures edged up by just 3.25 points despite a 36.5 point trading range. 

Crude continues to speed towards $20 with drivers everywhere hailing the return of dollar/gallon gasoline. US Oil Fund ETF (USO, 9.25) fell another 0.55 today, with shares down 11.5 percent in 2016. CBOE’s Crude Oil Volatility Index (OVX) measures 30-day implied volatility in the USO ETF and is near it’s 5 year high.  




The last time we saw such extraordinary levels of volatility was in Aug, Sep, and Nov of 2011.  August ’11 was weak Chinese PMI, September was a discreet event (S&P downgrade of US Credit Rating), and November saw a sharp price reversal on Mid-east concerns and a weaker dollar. 

Four years later, we’re seeing similar OVX levels with consecutively higher spikes.  Even if crude reverses sharply, USO options volatility may still reach record highs. Even with the possible digestion day and short covering in today’s session, I think crude futures close this week having broken the $30 level. Both the USO Jan 9 and 9.5 Straddles are priced about $0.60, implying nearly 6.5 percent movement prior to Friday’s expiration. 

My trade: Buy the USO Jan 9 Puts for $0.20

Risk: $20 per 1 Lot

Max Reward: $905 should USO go to $0

Break-even (share price at expiration): $9.05





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