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Since its intraday high back on March 1st oil, as represented by the United States Oil Fund (NYSE: USO), has lost 25.5%.
As a result, the implied volatility has increased to almost 40%. This is important because it means that the price of USO options in August are inflated. And, as premium sellers of options we can take advantage of the pricey options by using credit spreads.
As an options trader and a self-directed investor I really don’t necessarily care about the underlying as long as it is liquid. My concern, particularly when selling options is that the implied volatility and associated price of the option is high enough that I can bring in decent premium on a monthly basis.
Currently, USO offers this type of set-up.
So, how can we take advantage of the current inflated options prices in USO?
Look no further than a range-bound trade/investment known as an iron condor.
An Iron Condor strategy is a non-directional options strategy that profits when the option on the underlying stock or ETF of your choice expires within your chosen range at expiration.
The basic premise of the strategy is easy: you choose the price range of the trade. Increasing the range will decrease your potential profits, but will increase your likelihood of success.
USO has been trading between 33 and 29 over the past month and if you think it will stay around that area over the next 38 days an iron condor trade might be the most appropriate.
In fact, we can increase the range significantly say 27-36, a 9 point range and still make 12.5%.
This means that with USO currently trading at $31.50, the liquid oil-based ETF would have to breach the breakeven levels of $26.75 or $36.25 level by August 17th (38 days) before the trade begins to take a loss.
It would take roughly a 14.0% move to the upside or downside over the next 5 weeks before the position is in jeopardy of taking a loss.
Best of all, the probability of success on the trade/investment is a staggering 89%. Yes, that means that there is only a 11% chance that USO will move outside the $26.75 – $36.25 range over the next 38 days. I like those odds.
When the market is going nowhere fast, the Iron Condor provides safe and reliable returns that you can capture month after month.
If you have any questions about the intricacies of the strategy or using probabilities of success as a way to trade/invest please feel free to email me at [email protected], and follow me on Twitter at @OptAdvantage.