arrow-left arrow-right brightness-2 chevron-left chevron-right circle-half-full facebook-box facebook loader magnify menu-down rss-box star twitter-box twitter white-balance-sunny window-close
USO - Take my oil... please.
3 min read

USO - Take my oil... please.

USO - Take my oil... please.

Front month oil futures are having themselves a day. This is a good explanation of what's going on:

From CNBC:

West Texas Intermediate crude for May delivery fell more than 100% to settle at negative $37.63 per barrel, meaning producers would pay traders to take the oil off their hands.
This negative price has never happened before for an oil futures contract. Futures contracts trade by the month. The June WTI contract, which expires on May 19, fell about 18% to trade at $20.43 per barrel and was better reflecting the reality of the market. The June contract was more actively traded. The July contract was roughly 11% lower at $26.18 per barrel.
The international benchmark, Brent crude, which has already rolled to the June contract, traded 8.9% lower at $25.58 per barrel.
The front part of the oil futures ‘curve,’ which is the May contract that expires on Tuesday, was hit the hardest since it applies to fuel that’s set to be delivered while most of the country remains on lockdown thanks to the coronavirus. The only buyers of oil futures for that contract are entities that want to physically take the delivery like a refinery or an airline. But storage tanks are filled so they don’t need it.


Unusual Options Activity

As one would expect there were plenty of large options trades in USO today, and many were on the call side. Two big prints stick out, one near term where nearly 50,000 of the 4.00 calls (expiring 5/1) have traded. And the other is out in October where nearly 40,000 of the 5.00 calls have traded.

The Set Up

In January, the United State Oil ETF USO was above $13. Today it checks in around $3.90. As for how options are pricing the next two months?

From OptionsAI technology:

Bullish consensus 2 months out is a measly $5.25. So options are obviously not expected a quick snap back in the ETF dollar wise, even though it's a large percentage.

Background on USO

USO is an ETF that attempts to replicate crude oil futures. That's easier said than done. These ETFs need to sell the front month month futures, and buy further months, each day. Things get weird when those prices diverge, sell low, buy high, all day (contango).

It could be argued that the weirdness in today's front month futures is partially related to oil ETFs like USO. In fact, Bloomberg reported that USO owned 25% of the outstanding volume of May WTI oil futures contracts as of last week. USO can not take physical delivery of oil, obviously.

Ways to Play

The issue that USO has (and many other ETFs that involve futures rolling) is that the price of that roll makes moves in the underlying irrelevant, especially over time. (USO is selling -$36 and buying +$20 each day on a portion of the portfolio.)

Therefore any bullish options strategy in USO can double that risk by having 'decay' in both the options, and the ETF itself.

For example, here's a bullish price target, on the expected move using OptionsAI technology and the trades it returns:

Because of the downward pressure in the ETF from the roll itself, buying calls, or even call spreads doubles down on the decay. Selling a put spread or buying the ETF and selling an upside call increases probability of profit, and at least relieves the pressure of one of the sources of decay.

Either way, USO is a tough way to play for bounces in crude oil when the roll conditions within the ETF are so out of whack. If the conditions were to reverse, with near term crude oil futures higher than further months, the ETF performs "better". But that isn't likely to happen soon, and when it does, it doesn't last long. And as we saw in XIV, there is risk of these types of ETF going to zero, and USO could some day. But at least they stop at zero, unlike oil today.

Actionable Insights from the Options Market

Earnings event expected moves
Unusual activity alerts
Spread trade education

Broker Dealer (FINRA Registered)

Built for one-tap spread trading
No chains. No per contract fees.
Powered by OptionsAI technology (Patent Pending)