An Update on Crude Oil Volatility Play

  • SumoMe

Well I am not going to say that I “called the bottom” in crude oil.  Because the reality is that I simply do not possess that ability.  That being said, I am pretty good at:

*Spotting trends

*Recognizing wildly “overdone” buying or selling.

(See also It’s Soon or Never for Soybeans)

In this article on 2/16 I highlighted a chart that I saw in this article.  The implication of the chart was that crude oil – at least when compared to gold – was, well, wildly overdone to the downside.  So on the same day I wrote this article.  Today’s piece is an update of the example trade highlighted in that article.

USO Modified Butterfly

I noted at the time that implied option volatility for ticker USO was at an extremely high level and highlighted an example trade using a strategy referred to as a “modified butterfly spread”.

The original trade on 2/16 appears in Figures 1 and 21Figure 1 – USO July Modified put butterfly (Courtesy

2Figure 2 – USO July Modified put butterfly risk curves (Courtesy

Since that time:

*USO has rise from $8.31 to $10.11 (See Figure 3)

*The implied for USO options has declined – but still may have a lot further to fall (See Figure 4)

3Figure 3 – USO bounces (Courtesy AIQ TradingExpert)6Figure 4 – USO implied volatility off of highs (Courtesy

So the trade now stands with an open profit of $464 as shown in Figures 5 and 6.4Figure 5  – Updated USO July Modified put butterfly (Courtesy

5Figure 6  – Updated USO July Modified put butterfly (Courtesy

If price were to remain unchanged through July expiration the profit would increase from $464 to $692.  However, that is still 130 calendar days away.


Sit and wait – if price does not collapse once again and/or implied volatility drifts lower then the trade’s profit will increase over time.

Close the position now – given the volatile nature of crude oil and the fact that this could be nothing more than a rally in a bear market, it might make sense to “take the money and run”.

Adjust – One possibility would be to close half the position.  The Good News: If USO dropped back below its low of $7.67 the position could still be exited with a profit (probably in the $200 range).  The Bad News: the profit potential drops from $692 to $578 (current open profit = $464), so you would be sitting with a trade for another 130 days for an additional profit potential of $114.

I would be itching to take the money and run at this point.  However, an alternative would be to hold on as long as price is stable and IV is declining – but consider closing out the position at the first sign of trouble for USO.

Jay Kaeppel