Oil bears double downside bet in key ETF: Options recap


Disclosure: This post is intended for educational purposes only. Options trading may not be suitable for all investors.

We just wrote about the drop in oil as the market braces for potential supply increases at next week’s OPEC meeting. Almost simultaneously, a big options trade in the U.S. Oil Fund (USO) looked for the selloff to continue:

  • 50,000 29-June 12.50 puts were bought for $0.12
  • 21,750 29-June 13 puts were sold for $0.27.
  • Volume was below open interest in the 13s, which suggests an existing position was rolled lower and doubled in size.

Puts fix the price where a security can be sold, so they can profit to the downside. (See our Knowledge Center.) Today’s trade is especially interesting when you take a deeper dive at the “Greeks” of the contracts involved…

Delta: How many cents do the options move versus the underlying? Their “net delta” remained pretty much the same because they sold puts with a -0.44 delta and bought twice as many with a -0.22 delta.

Gamma: How much does delta increase when the stock moves? I like to think about is as leverage on leverage. If they’re right and USO falls, their delta will rise. They sold options with 0.50 gamma and bought twice as many with 0.36 gamma. That means they now have more leverage to the downside.

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Vega: How much does the value of an option increase if implied volatility rises? Both contracts have 0.01 vega, according to our OptionStation Pro tool. So by doubling the number of contracts they now stand to profit even more from the kind of volatility that may occur before OPEC’s June 22-23 meeting in Vienna.

In conclusion, the trader seems to have made some money on the drop in oil and is looking for bigger drops plus more turbulence in black gold over the next seven days.

USO fell 3.13 percent to $13.10. The bearish roll was the third-biggest trade in the entire market today. It pushed overall options volume in USO to twice the average in last month, with puts outnumbering calls by almost 3 to 1.

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David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.