Oil prices jumped after President Donald Trump reinstated the blockade on the Strait of Hormuz. The move follows the latest rounds of strikes between Iran and the U.S. over the weekend. The volatility is creating a unique opportunity in the options market.
The United States Oil Fund (USO), the ETF that best tracks oil prices, offers equity options traders a liquid, accessible alternative to the complexities of the futures market. Although uncertainty in the Gulf is creating near-term volatility, longer-term crude is structurally likely to face some upside resistance as well, presenting an ideal setup for premium sellers looking to exploit elevated options prices.
On the downside, a structural floor persists as protracted conflicts in the Middle East continue to strain global oil supply chains and distort transit routes. Compounding this tight physical reality is the status of the U.S. Strategic Petroleum Reserve (SPR). Following massive drawdowns by the Biden administration ahead of the 2022 midterm elections, the SPR was already at multi-decade lows before the Trump administration depleted it further to offset the squeeze Iran put on oil exiting the Persian Gulf during the latest war. With the government fundamentally needing to refill the reserve rather than drain it further, the SPR has transformed from a political tool for price suppression into a major backstop against sharp declines in crude oil prices.
Conversely, the upside may also face some resistance as the U.S. continues to pump crude at record-shattering levels, acting as a massive structural counterweight to OPEC+ supply cuts. Looking further out, the tentative, long-term return of Venezuelan supply promises to add further barrels to global balances over the coming years. On the demand side, economic headwinds persist. China’s multi-year slowdown, combined with the steady, secular shift toward alternative energy sources, continues to dull long-term demand and has fundamentally altered global consumption projections.
In other words, oil prices could remain range-bound for some time, which is great for short premium strategies.
With oil caught between an SPR-supported floor and a supply-heavy ceiling, implied volatility has pushed well above historical averages. This premium expansion sets up perfectly to target the downside by selling a cash-secured put.
Selling an out-of-the-money cash-secured put allows traders to capitalize on high implied volatility without taking on the upside risk of a call spread, especially in an environment where structural supply caps make a runaway rally unlikely. By underwriting the downside insurance that the market is currently overpricing, you extract a premium that accelerates via time decay (theta) over the next two months.
United States Oil Fund, YTD
For USO, the execution targets a ~30 delta strike roughly 45-60 days out from expiration. This positioning places the strike well below the current market price, deep within the safety net provided by the depleted SPR and geopolitical supply constraints.
If USO stays range-bound or grinds higher over the next 6-8 weeks, the put option will lose value rapidly, allowing the trader to buy it back cheaply or let it expire worthless for maximum profit. If a macro slowdown temporarily pushes oil lower, the high premium collected lowers the effective break-even point, leaving the trader well-positioned to either defend the position or take delivery of USO shares at a significant discount.
As I write this, an investor could sell the USO August 28th weekly $100 put at $2.40. Collecting an annualized 18%+ or purchase USO at a 10% discount. If one is “put the stock” (aka “assigned” On the short option and compelled to purchase the ETF at the strike price), one can consistently lower the effective cost basis by selling covered calls against the resulting position for as long as implied volatility remains above average.
If the USO stays here, you’ll collect the full premium. If it rises, you’ll still collect the premium. In fact, even if it falls, you won’t see losses until the USO falls below that put’s strike by more than the collected premium, or in this case, $97.60. So, in other words, a trade that makes money if USO goes up, down or no where at all. A win-win scenario.
Trade breakdown
- Sell August uso august 28th weekly $100 put for $2.40
- Max gain $240
- Max loss $97.60
- Skill level: Intermediate
