USO Option Activity Indicates A Tide Change For Oil

USO Unusual Option Activity

Since last October, the option interest in the oil space has been decidedly bullish and energy ETFs like the United States Oil Fund LP (NYSEARCA: USO) have done well. However, the tide appears to have changed on Monday as put option activity in the fund surged. This places oil in an interesting position as the fundamentals have been strong but the valuation is stretched. This comes as the tide of liquidity, driving speculation, is beginning to reverse. This places oil and oil stock investors in the precarious position of wondering whether to take profits.

Oil Futures Term Structure

One of the bullish indications for oil and which has helped USO track oil prices is the futures term structure. The term structure can be characterized as either normal, contango or backwardation. Over the past few months, oil has been trading in backwardation. This is characterized by falling oil futures prices as you move out in time.

The oil futures term structure is trading in backwardation, which is an indication of a potential shortage. However, the price difference as you move out from the April to May contract has flattened over the past week. The shift could be a result of waning speculative interest and an early indication of a correction in oil prices. A continued flattening and eventual rising term structure would confirm the shift in supply/demand expectations.

USO Option Activity

Option volume on USO was nearly 2.5 times the average on Monday. The call volume about 1.9 times the average while put option activity was 3.2 times the average. As you breakdown the composition of the activity, the put volume was filled at the ask on over 77% of trades. That’s a strong indication of put option buying. The put-to-call ratio finished at 1.31, which is an example of the significant put option activity. Here’s a summary of the unusual option trades on USO:

  • 59,162 26 MAR 21 $44 puts BOT in four prints @ $1.57 to $1.58
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