Trade view /
01 June 2016 at 14:38 GMT
USO, the exchange-traded fund that follows the WTI crude oil price, made a double top on the chart at $12.12/12.13 on May 26 and May 31 respectively.
Stochastics and RSI are giving a selling signal.
Let's buy the Jun16 $11.50/10.50 put spread to play a 50% retracement of the last bullish wave ($8.99/12.13 on $10.56).
Entry: Buy 10 Jun16 11.50/10.50 put spread at $0.24
=> Buy 10 Jun16 11.50 put at $0.30
& Sell 10 Jun16 10.50 put at $0.06
Maximum profit at expiry is limited
Maximum profit at expiry achieved when underlying price =< short strike price
At expiry maximum profit = long strike price minus short strike minus premium paid
= $11.50 - $10.50 - $0.24
For 10 put spreads you pay a premium of $240 ($0.24 x 100 ETF x 10 lots) to receive a profit of $760 ($0.76 X 100 ETF X 10 lots) if the market closes at or below $10.50 at expiry.
Return on investment if the market closes at or below $10.50 at expiry
= profit/premium x 100
= $760/$240 x 100
Maximum loss is limited to premium paid
Maximum loss is $0.24, or $240 for 10 put spreads
Break even point at expiry
Long strike - premium paid
$11.50 - $0.24 = $11.26
Target: $10.50 or below
Time horizon: 16 days
USO 5-year chart
— Edited by John Acher
Non-independent investment research disclaimer applies. Read more