When looking through option plays we like to take notice of any major divergence between realized and implied volatility.

An interesting chart we ran across was USO (United States Oil Fund).



Right now implied volatility is trading at a large premium to realized.  It is not unusual for implied volatility to trade above realized volatility, infact that is the norm.  

However, implied volatility is currently trading ~20% and 30 day realized volatility is only at ~13%.  What is creating this large gap in volatility?  We don’t see any real reason for the gap, and it definitely isn’t because of stock movement.

What we like in USO is to sell premium.  With volatility high and the stock not moving it is the perfect time to collect premium with put sales.

Looking at the chart we really have three main levels to sell puts at.  All of these levels are protected by strong support incase oil does decide to drop.



Looking at the options chain we can venture out into March which is 37 days away.  Our first level (Aggressive) is at $33.50.  Looking at the puts on the 33.5 strike we can sell them at .42 for a return of 7.86%.  We set this one as aggressive because it keeps our breakeven 4.3% away.

Our next level down (Moderate) is at $33.  We can sell the 33s at .33 (that is a lot of 33) for a 6.84% return.  Our breakeven is 5.8% away.

Our last level (Conservative) is down at $31.20.  We can get close to that one with the 31.5 strike at .16.  That would give us a return of 4.76%.  This one is the most conservative of our plays because the breakeven is 10% away.  

By picking the right strike we are able to set how risky we want the position and also how bullish we are on oil.  Obviously if you take the 33.5 strike you expect oil to move higher.  If you take the 31.5 strike then oil can move higher or lower and you can still profit.