Oil prices soared after President Donald Trump reopened the closure of the Strait of Hormuz. The move follows a series of recent attacks between Iran and the United States over the weekend. Volatility creates unique opportunities in the options market.
of United States Oil Fund (USO)ETFs, which best track oil prices, offer stock options traders a liquid and accessible alternative to the complexity of futures markets. While Gulf uncertainty is creating short-term volatility, long-dated oil is also structurally likely to face upside resistance, creating an ideal environment for premium sellers looking to take advantage of rising options prices.
On the downside, the structural floor remains as protracted conflicts in the Middle East continue to strain global oil supply chains and distort shipping routes. Compounding this harsh physical reality is the state of the U.S. Strategic Petroleum Reserve (SPR). The SPR was already at multi-decade lows until the Trump administration further depleted it to offset Iran’s squeeze on oil from the Persian Gulf during the recent war, following a major rollback by the Biden administration ahead of the 2022 midterm elections. Because governments essentially need to replenish reserves rather than deplete them further, the SPR has transformed from a political tool to suppress prices to a major backstop against plummeting oil prices.
Conversely, the upside could face some resistance as the US continues to supply oil at record-breaking levels, acting as a major structural counterweight to OPEC+ supply cuts. Looking further ahead, Venezuela’s interim and long-term supply recovery is expected to further increase global balances in the coming years. On the demand side, economic headwinds continue. China’s multi-year economic slowdown, combined with a steady long-term shift to alternative energy sources, continues to dampen long-term demand and fundamentally change global consumption forecasts.
In other words, oil prices are likely to remain range-bound for some time, perfect for a short premium strategy.
Oil prices are caught between an SPR-supported bottom and a well-supplied ceiling, with implied volatility well above historical averages. This premium extension is perfectly set up to take advantage of the downside by selling cash-backed puts.
By selling out-of-the-money cash-backed puts, traders can take advantage of higher implied volatility without the upside risk of call spreads, especially in environments where structural supply caps make runaway rallies less likely. By underwriting downside insurance where the market is currently priced high, we extract premiums that accelerate with time decay (theta) over the next two months.
US Petroleum Fund since the beginning of the year
For the USO, it covers up to 30 Delta strikes approximately 45 to 60 days after expiration. This position places the strike price well below the current market price and deep within the safety net provided by SPR depletion and geopolitical supply constraints.
If the USO stays range-bound or rises over the next 6-8 weeks, the put option will quickly lose value and the trader can buy it back cheaper or let it expire worthless for maximum profit. If oil prices temporarily fall due to a macroeconomic slowdown, the high premiums charged will lower the effective break-even point, putting traders in a better position to either protect their positions or take delivery of USO shares at a deep discount.
As I write this, an investor could sell the USO August 28 weekly $100 put for $2.40. Collect more than 18% APR or buy USO at 10% discount. If you are forced to buy an ETF at the strike price when you “place stock” (aka “assigned”) on a short option, you can consistently lower your effective cost basis by selling a covered call against the resulting position, as long as the implied volatility is above average.
If the USO stays here, the premiums will be recovered in full. Insurance premiums will still be collected even if the price increases. In fact, even if it falls, you will not incur a loss until USO falls below the strike price of its put by more than the premium collected (in this case, $97.60). This means that you can make a profit even if the USO goes up, down, or doesn’t go up at all. A win-win scenario.
