My first option trade was in 1990 on a crude oil contract leading up to Gulf War I.? I was convinced oil prices would rise and I was right.? I don?t remember how high crude went at the time, maybe $40 or $50 a barrel, but it was a nice win.? That was my start trading options and I was a market maker a couple months later as the coalition forces invaded.? That is another story.? As exciting as the pop in oil prices was at the time the more amazing thing is what happened once the allies invaded.? Oil dropped by a huge amount per barrel in one day.? It was 22 years ago and the exact number is still a little fuzzy.? That began the way I approach trading oil most of the time which is essentially wait for something to happen in the Middle East.? We had something this week.
Using USO as a proxy for oil prices and you can see we had a pop on Friday and big spike on Monday.? There is no doubt the conflict in the Gaza Strip had something to do with it.? While that region continues to deal with the tragic stalemate it does ignite the price of oil.? I think 5 years ago the USO would have been up $6 on the much tighter supply.? The relatively muted move probably means oil is a bit looser than everyone thinks.
Chart by TOS ?www.thinkorswim.com
Ultimately I like to see what paper is paying for options and after today the answer is not much.? The view for the OptionVision screen gives a snap of implied volatility across the USO.? The red buildings are just the strikes of the each series with declining implied volatility (calls left and puts right).? Notice the near total annihilation of implied volatility expiring this week which is the term on the far left.? If paper cared about the mix up in Gaza those strikes would be dark green.? I expect oil to settle back to some near term lows but there could be a bump or two in the process.
3D chart from ORATS and Aqumin (www.optionvisionpro.com)
The trade
Set up a $2 wide put butterfly in the Dec cycle like a 28.5/30.5/32.5 for a sub .60 debit.? That way a further decline in IV won?t be a problem.