Oil prices: could record reserves drive oil prices up $100? This call option is betting on it

If investors were given a crystal ball in early 2023 and told them that the conflict in Ukraine would continue, stocks would soar and a recession would not materialize, they would undoubtedly be bullish on the financial sector. energy and oil prices.


Unfortunately, even psychics can be wrong. Crude oil prices remain virtually unchanged in 2023, currently at $76 per barrel.

Admittedly, some negative factors have pushed down oil prices. Mainly, the long-awaited growth associated with the Chinese reopening fell flat.

Nonetheless, the crude oil market remains extremely tight, with Saudi Arabia recently announcing further production cuts to support prices and U.S. strategic oil reserves at the lowest levels since 1983.

For investors bullish on oil, they can buy oil stocks, an energy ETF such as Energy Select Sector SPDR (XLE), or for direct exposure buy US Oil Fund (USO), which holds futures contracts on the price petrol. Specifically, it tracks US light sweet crude oil.

However, with low volatility, a call option on the oil fund can be a good bet.

Buy a call on USO to bet on oil prices

With USO trading around 68, investors can consider a 75-strike call option with an expiry on September 15th. This call currently has a cost of $1.05, which also coincides with a maximum loss of $105 if the USO stays below 75 at expiration.

For the USO to reach 75, oil prices would need to rise about 10% from current levels. Therefore, investors will still be losers if oil has only a modest gain over the next two months.

However, the profit on the call in the event of an out-of-gauge move is unlimited. An extreme move pushing Crude Oil up to $100 by September 15 would see the USO likely around 89, generating a 1300% return on the option.

Notably, the USO doesn’t even need to hit 75 for investors to make a profit as long as the move happens early, with enough time until the option expires.

However, with each day that passes without USO moving, the time value of options (or theta) will decrease. This would result in a lower premium and losses for investors.

Check out IBD’s new OptionsTrader app for options education, trading ideas and more! Download today from the Apple App Store.

Annualized volatility for September options is currently 29.5%, below the 32% and 35% volatility realized over the past 30 and 200 days, respectively.

While crude has remained range-bound this year (Relative Strength Rating of 26), prices have rallied lately and are up 6% in the past five days.


Stock market forecast: Watch for these warning signs after big gains in tech stocks

Get Free IBD Newsletters: Market Readiness | Technical report | How to invest

IBD Live: learn and analyze growth stocks with the pros

Get Free IBD Newsletters: Market Readiness | Technical report | How to invest

Leave a Comment