The oil price took a hit back in July due to nervousness about a slowing U.S. economy.
From its peak to early this month, the United States Oil Fund (USO) dropped by over 15%. (USO tracks the crude oil price.)
But that sharp sell-off put USO close to oversold territory. And its down move looked overdone.
USO appeared to be setting up for a potential bounce… (I wrote more about oil finding a foothold last week.)
That’s how subscribers to my Opportunistic Trader advisory banked a 41.2% gain in just 10 days.
So let’s check how we did it…
A Repeating Pattern
On the chart of USO below, you can see that the sell-off began in July.
It traded in a tight range through the middle of August. Then the down move accelerated into the start of this month.
But that rapid sell-off pushed the Relative Strength Index (RSI) near oversold territory (right brown circle):
United States Oil Fund (USO)
Source: eSignal
We were looking for a repeat of the same pattern back in June (left brown circle).
Back then, we grabbed a 39.7% profit in just two days when the RSI formed a ‘V’ and rallied from oversold territory.
And our recent USO trade had one other factor…
USO was also approaching a key support level (around the $66–67 level).
That, along with the RSI rallying from oversold territory, would give greater energy to a recovery.
So on September 6, I recommended buying a call option. A call option increases in value when the underlying asset rallies.
But we went slightly too early with the trade…
Take another look:
United States Oil Fund (USO)
Source: eSignal
USO drifted lower over the next couple of days before bottoming out. After that, though, it finally began its rebound higher.
That rebound coincided with the RSI rallying from oversold territory – just like back in June.
USO continued to rally as momentum steadily climbed.
With our position in good profit and the RSI approaching resistance (green line), we sold our call option on September 16.
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The Power of Options
We captured this 41.2% gain in 10 days using options.
Options magnify gains and losses compared to just trading shares.
The trade-off is that options have a finite life. Time decay erodes the value of your option until it eventually expires.
But if you can catch a move like we did here, you can quickly bring in incredible profits.
And mean reversion helps us identify when a stock has overstretched in one direction. We aim to profit when it snaps back the other way.
By combining these types of sharp moves with options, we have a powerful strategy that can make a big difference in our trading account.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict