Hey there, Power Profit Traders!
Before we get going on today’s Power Profit Trades, be sure to watch Money Morning LIVE at 8:30 a.m. ET each day, and tune in at 10:30 a.m. ET right here for my man Chris “CJ” Johnson, who is going over the penny stock he didn’t get to touch on last night. You’ll wanna be there as he analyzes the recent market chop!
And as I mentioned yesterday, you can now find replays of MY 9:30 a.m. sessions right here! From the main Money Morning LIVE room, just click the icon after Daily Picks in the navigation bar and look for Tom Gentile Replays.
Never miss a lesson!
Now today, I’m discussing the big bearish move in US crude oil that’s been in the works since late October. And while some might be trying to profit by selling futures contracts, I’ve been taking a relatively easier and more risk-controlled approach through the options market.
US crude oil is priced on the benchmark West Texas Intermediate (WTI) price that is tracked and traded on the New York Mercantile Exchange (NYMEX).
And from the recent high at $84.65 on Oct. 26 to yesterday at $70.49 per barrel – WTI has dropped by 16.74%.
US WTI Crude Oil Prices – Source: NYMEX & Bloomberg
This is a big bear move that picked up momentum as the Omicron variant began to really take hold around the globe.
WTI had been rising, with economic growth fueling demand that had been outpacing global supply.
But with the virus and the renewal in Europe and Asia for work-from-home opportunities, demand expectations got shoved into reverse.
Meanwhile, the Organization of Petroleum Exporting Countries Plus Russia (OPEC+) stayed the course on plans to increase allowable production, joining US producers…
And in the US, this has led to stockpile gains in the key storage hub for oil in Cushing, Oklahoma, as reported yesterday by the US Energy Information Administration (EIA). While overall weekly US stockpiles dropped – it came with a massive increase in US exports last week.
In short: the law of Supply & Demand is weighing on black gold.
And overall global supply and demand is set to be off-balance for a while into 2022… In fact, the International Energy Agency (IEA) reported earlier this week that it sees a glut in oil lasting for a while – largely on the virus flare-up slowing global consumption.
So, with lots of supply and lessening demand in the US for a while – how do I play oil these days? Let’s talk about it!
The Way I Profit from Dropping Crude Oil Prices
I love trading options – they allow me flexibility and leverage, and are less expensive than buying or shorting shares outright.
And with the expansion in the stock market for all sorts of ETFs that cover nearly any sort of security segment – it’s never been easier to speculate on entire SECTORS using options.
The United States Oil Fund LP (USO) is a limited partnership set up as an ETF, structured to synthetically track the price changes of WTI crude oil delivered to Cushing, Oklahoma. And specifically, the ETF targets the change in price for WTI on the New York Mercantile Exchange (NYMEX) futures contracts.
This means that USO essentially reflects day-to-day changes in WTI oil prices.
Price Performance Comparison USO ETF and WTI Future Contract – Source: Bloomberg
As with any ETF, there is always a modicum of a tracking error – but note that USO tracks the percentage changes and not the direct price of WTI crude, hence the modest variation.
But back to the trade.
In late November, I saw that USO had breached a former low, gapping lower on a big surge in volume. After the gap, I identified a major resistance level at $52.
So on Nov. 30, after my analysis showed a Surge Strike Entry for my Operation Surge Strike, I recommended a bearish options trade on USO.
USO Surge Strike Entry Analysis – Source: TomsOptionTools.com
Actually, I used two different options to place my bet, as I wanted a cost-controlled trade…
I put together a Bear Call Spread trade on USO with options expiring tomorrow, Dec. 17.
The bear call spread consisted of:
- Selling to open a $52-strike call option, to bet on chart resistance at that level, and
- Simultaneously buying to open a higher-strike call as a form of options insurance
The bought call minimizes the upside risk on the trade, should USO unexpectedly rebound above the sold call strike.
Because the premium received from selling the $52-strike call exceeded the premium PAID for the higher-strike call, the spread was opened for a net credit – which represents the maximum reward on the trade.
The goal of this strategy is for both calls to expire out of the money (OTM), meaning USO staying below both strikes…
Yesterday, with the further softness in US WTI prices – the options on USO met my 80% maximum profit target.
The key here is you don’t have to trade stocks or even futures to make a profitable trade on an entire sector or even a commodity – you can trade ETFs, and better yet, ETF options.
So, kids, that’s your Power Profit Trades lesson for today! Be sure to catch my man Chris “CJ” Johnson at 10:30 a.m. ET right here – he’ll be going over the penny stock he likes right now, that he didn’t get to deliver last night.
Have a great day!
Tom Gentile
America’s #1 Pattern Trader
