United States Oil Fund LP (USO) Ratio Put Spread

Shares in the United States Oil Fund (NYSEArca:USO) hit new 52-week high Monday morning, but one huge options player is positioning for the price of the underlying to pull back ahead of April expiration. It appears the trader initiated a sizable ratio put spread to benefit from limited bearish movement in the fund’s shares.

The USO’s shares increased as much as 1.1% at the start of the session to secure an intraday- and two-year high of $42.79. The contrarian player purchased 12,500 puts at the April $41 strike for a premium of $1.71 each, and sold 25,000 puts at the lower April $38 strike at a premium of $0.64 apiece. Net premium paid to establish the spread amounts to $0.43 per contract.

The ratio spread positions the investor to make money should shares in the USO fall 5.2% from today’s high of $42.79 to breach the effective breakeven price of $40.57 ahead of April expiration day. Maximum potential profits of $2.57 per contract are available to the put player if the fund’s shares drop 11.2% to settle at $38.00 at expiration. The ratio of twice as many sold lower-strike puts suggests the investor foresees limited downside movement in USO shares. But, the parameters of the spread expose the trader to losses in the event that the price of the underlying fund declines 17.2% off today’s high to slip beneath the lower breakeven price of $35.43 within the time remaining to April expiration.

Shares in the USO last fell under $35.43 on February 16, 2011. Over 193,000 option contracts have changed hands on the USO as of 11:40am, with investors prefering calls over puts, trading approximately 1.5 call options on the fund for each single put option in play.

USO closed Monday at $42.37, up $0.04, or 0.09 percent.





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