Insuring USO From Oil Volatility Monster w/ Put Options ($OVX) - Reflection of April Complacency Capitulation and Failed Breakout (May/July USO Puts)

Look how put options on the Oil ETF $USO actually made long portfolios MORE money on the failed ceiling breakout. In other words, if traders were trying to time an oil spot spike above that 6-month ceiling resistance level and hedged against oil volatility monster risk ($OVX was at 2 year lows, as far as the chart can see), they not only protected their capital (depending on hedge ratio) but made more money on the other side of their own trade, Goldman RMBS desk style!

Take a look at oil posts during the month of April, the month of complacency, before the $USO oil volatility monster TKO'd longs and pushed sellers near channel support ($34-$35 - see chart below).  $USO closed at $36.31 on Friday and clawed through the 50 and 200 day moving average.  I want to point out how at-the-money puts insured against downside volatility risk.  From April to May 7, when USO was trading at 6-month resistance between $41-42 and $OVX was at multi-year lows, the May and July $41 puts increased 150% to 300%, $OVX increased 42% and $USO lost 12%.  Oil volatility was in a coiled spring if it couldn't clear resistance, that's why I thought cheap protection against the oil volatility monster was a decent idea.

Below are charts from April 1 to May 7 comparing $USO (Oil ETF), $OVX (CBOE Crude Oil Volatility Index/$USO Options), USO March 2010 $41 Put and USO July 2010 $41 Put performance.  It's all about timing and pricing each option's ability to move using implied volatility and the "greeks".  Check out investingwithoptions.com for more info.  For example, when complacency capitulated, the May $41 put was down 50% while the July put was only down 28%.  However, as you can see in the chart, the front month option increased 300% vs. 150% in July.  This is backward looking activity folks, I thought it was interesting how longs could win so big by losing.

April-May 7: $USO, $OVX, March 2010 $41 Put, July 2010 $41 Put
(Chart courtesy of OptionsXpress)

$USO vs. $OVX (Oil Volatility Index)
(Chart courtesy of StockCharts.com)

USO Channel since October 2009 $34-42

$OVX (Oil Volatility Index) Hit a 2-Year Low!

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