Oil prices have been climbing amid increased expectations members of the Organization of Petroleum Exporting Countries (OPEC) and non-cartel members will extend their production cut agreement at next week's meeting. This positive price action is continuing today, with January-dated crude futures up 1.9% at $57.88 per barrel, after data showed a surprise decline in domestic crude supplies. As such, the United States Oil Fund (USO) is 1.6% higher at $11.59, bringing its three-month gain to roughly 17%, and the exchange-traded fund (ETF) could be catching options traders off guard as a result.
In fact, over the past 10 sessions at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), options traders have bought to open 114,802 puts on USO, compared to 48,260 calls. The resultant put/call volume ratio of 2.38 ranks higher than 94% of all comparable readings taken in the past year, meaning long puts have been initiated over calls at a faster-than-usual clip.
Diving deeper, the February 10.50 put has seen the biggest rise in open interest over the last two weeks, with 37,970 contracts added. This strike is now home to open interest of 40,573 contracts, while peak open interest of 178,181 contracts is found at the January 2018 9-strike put -- and data from both Trade-Alert and the major options exchanges confirms notable buy-to-open activity at each put.
While it's certainly possible vanilla options bears are bracing for a big retreat in crude prices, given USO's recent run up the charts -- and that each of these put strikes is out of the money -- it's possible that those long oil are protecting paper profits against a potential post-OPEC pullback. Plus, the latest Commitments of Traders (CoT) report showed large speculators in a record net long position on the crude contract.
It's certainly an attractive time to initiate a hedge with USO options. The fund's Schaeffer's Volatility Index (SVI) of 24% ranks lower than 94% of all comparable readings taken in the past year, while its 30-day at-the-money implied volatility of 23.1% is docked in the 3rd annual percentile. These two volatility indicators suggest low expectations are being priced into short-term options -- a potential boon to premium buyers.