USO Options Trader Eyes a Post-OPEC Volatility Crush

Oil prices have been climbing on signs global crude producers will agree to extend output cuts at this Thursday's Organization of the Petroleum Exporting Countries (OPEC) meeting. June West Texas Intermediate crude is currently trading north of $50 per barrel, in territory not seen since late April. The United States Oil Fund (USO) has been charging higher, too, up nearly 13% from its early May lows near $9.40 to trade at $10.60. Against this backdrop, one options trader may be hoping OPEC optimism has already priced into USO shares, or they're betting on a post-event volatility crush.

Specifically, two symmetrical blocks of 5,200 June 10 puts and 11 calls traded at the same time earlier, with data from the International Securities Exchange (ISE) confirming sell-to-open activity. As such, it seems safe to assume a short strangle was initiated for an initial net credit of $135,200 ($0.26 premium collected per pair of options * 5,200 contracts * 100 shares per contract).

This also represents the maximum potential reward on the play, should USO settle anywhere between the two breakeven points of $9.74 (put strike less the net credit) and $11.26 (call strike plus the net credit). Risk, meanwhile, can be quite substantial, considering both legs are "naked" short options. However, the options trader could be hoping that implied volatility on USO's June options retreats over the next several weeks, which would make it cheaper to buy back the contracts, if need be.

The options market is still pricing in relatively low volatility expectations toward short-term USO contracts, though. Not only does its 30-day at-the-money implied volatility of 29.6% rank in the 31st annual percentile, its Schaeffer's Volatility Index (SVI) of 30% is perched below 80% of all comparable readings taken in the past year. This suggests it's a better time to buy premium on USO, versus sell it.

And widening the sentiment scope reveals USO options traders have been busy buying to open calls relative to puts in recent weeks. At the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), 65,842 USO calls have been bought to open in the last 10 sessions, compared to 41,899 puts. The resultant call/put volume ratio of 1.57 ranks in the 87th annual percentile.