Bears shoot for quick drop in oil fund
David Russell | email@example.com
optionMONSTER's Depth Charge monitoring system detected the purchase of about 4,400 weekly 33.50 puts on the U.S. Oil Fund for $0.38. A similar number of weekly 33.50 calls were sold around the same time for $0.34. Volume exceeded open interest at both strikes, indicating that a new position was initiated.
The trade cost just $0.04 and is highly bearish on oil, doubling the investor's money for every $0.04 that the fund closes below $33.46 this Friday.
USO was trading at $33.41 when the activity appeared and has continued to drop since. It now stands at $33.02, down 2.94 percent, in early afternoon trading.
Puts locks in a minimum selling price, so they get more valuable as a stock falls. Calls do just the opposite because they lock in a maximum purchase level.
Today's strategy is the same as shorting the fund because the long puts will appreciate to the downside, while the calls sold short will lose value. It will also lose money above $33.50.
The energy sector staged a dramatic rally over the summer, marked by a torrent of bullish options activity in domestic producers. But the sentiment has shifted in the last month as China's economy remains weak and the USO has hit resistance at its 100- and 200-day moving averages.