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Time to buy puts in United States Oil Fund (USO)

Once again Iran has decided to “rattle the cage” with the United States when Iran warned the United States Navy to not return a aircraft carrier to the Persian Gulf. This will not be the first time Iran has had run-ins with the United States. There is also the possible threat of possible Euro-zone sanctions against Iran imported oil that will lead to increased volatility in the price for oil. Iran is currently the world’s fourth largest oil producer, but is not a major consumer of oil. If investors believe oil is heading higher because of Iran, then taking a speculative bullish position in major oil companies or the Unites States Oil Fund may be the route to go. But, if investors believe this is yet another attempt by Iran trying to show their muscle by thinking that oil going higher is going to hurt the United States and other nations, then placing a short term bearish strategy may be profitable for the following reasons:
1) Since around 11/14/2011 every time oil has gotten to or surpassed the 100 dollar per barrel mark there has been a small pullback in the United States Oil Fund. See chart below.

1) Looking at the chart above investors will notice that Unites States Oil Fund has not been at the 40 dollar level since May 2011.

2) If the tensions temporarily subside with Iran investors could expect a pullback in the price of oil.

3) The United States will most likely work diplomatically to resolve conflicts that arise out of Iran that pose a threat to supply of oil.

In the long term I’m bullish on oil, but looking at the current trend of every time Iran “rattles the cage” this sends oil prices higher and there has been a small pullback in the price of oil when the tensions slowly subside. On January 3 the United States Oil Fund is up over 3.5% on the Iran tensions and with this big jump in the fund I’m looking to take a speculative put position. The March 40 strike puts are down over 20% on January 3. If you believe the tensions are temporary with Iran and in the short term the United States Oil Fund will not be going to 40 in the short term, then taking advantage of the volatility getting sucked out of the puts might make money for you.

Im continuing to watch the price of oil and will be watching the February or March 40 puts. If tensions subside in Iran I would be a short term buyer of puts for a quick trade, as oil could see a possible pullback.

Good Luck!