Hey traders and investors, Jared Levy here from Peak American Financial Group with your trade of the day. Today, we’re diving into the world of “Black Gold”—that’s right, we’re talking about oil ETFs like the US Oil Fund (USO).
The Setup: Understanding the Oil Market
Before we get into the trade, let’s talk about what’s happening in the oil market. Typically, lower interest rates lead to a weaker dollar, which can push oil prices up. That’s a basic principle, but here’s the thing: a lot of this is already baked into the current oil prices. What I’m focusing on is the looming crude oil glut.
I’m not seeing a major increase in demand on the horizon, and I do anticipate a reduction in refinery activity. This combination suggests that we might be heading toward an oversupply situation, which could pressure oil prices downward.
The Trade: Betting on a Drop in USO
So, how do we play this potential decline in oil? I’m looking at the United States Oil Fund (USO), a popular ETF that tracks the price of oil through front-month futures. Right now, USO is trading around $77.25, but instead of shorting it outright—which can be risky—I’m opting for a more strategic move.
I’m buying the October 81 puts on USO. These options are currently priced at about $6, but I’m comfortable paying anywhere from $6 to $6.50. My target? A $10 price on these puts. That might not sound like a huge leap, but it represents a solid 67% return on investment.
I’m targeting a drop in USO to around $70 per share, which I expect could happen by September or October, if not sooner. In essence, I’m betting that crude oil prices are going to weaken as the market adjusts to this expected glut.
Final Thoughts: Timing and Caution
Remember, this trade is all about timing and being mindful of the headlines that often drive crude oil prices. Right now, I believe crude is trading at a bit too much of a premium, and that’s why I’m selling into this recent strength.
As always, be careful out there—markets are extra volatile these days. I hope this trade idea helps you navigate the market effectively.
CLICK HERE to watch my segment on Business First AM covering this trade.
Disclosures
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