How We Banked a 36.5% Profit Trading This Rangebound Commodity By Larry Benedict, editor, Trading With Larry Benedict With so much focus on Big Tech and artificial intelligence stocks right now, you might be missing out on other opportunities. One of those is oil… I’ve traded oil a lot throughout my over 40-year career. You can milk it for gains when it’s trending… or stuck in a sideways band. After falling heavily during the early stages of COVID-19, oil began to recover around April 2020. It topped out in June 2022. And it’s been in a rangebound pattern since. We were able to use that to our advantage recently… After a reversal from the top of that range, we hitched a ride on its down move to generate a 36.5% gain for my subscribers. It wasn’t all smooth sailing, though. So let’s see how the trade unfolded… Rangebound Reversal The United States Oil Fund (USO) tracks West Texas Intermediate (WTI) crude oil. (WTI is the go-to measure for the world’s oil price.) USO peaked and reversed in January this year. That reversal coincided with the Relative Strength Index (RSI) coming back down from overbought territory (upper gray dashed line). When buying momentum rolls over and falls like this (orange circle), the stock price inevitably follows it lower: United States Oil Fund (USO) Source: eSignal (Click here to expand image) USO attempted to rally, but that quickly faded and reversed. So it looked like there could be more selling to come. Yet beyond the immediate price action, other factors were at play… The spot oil price was trading right on its 50-day moving average. A break below that meant a bigger down move could be in the cards. Plus tariffs would likely increase inflation and put pressure on interest rates. That would push the U.S. dollar higher. Oil and the dollar typically have an inverse relationship. So that would likely help push the oil price lower. We opened a put option to capture weakening oil prices. A put option typically increases in value when the value of the underlying stock falls. The trade initially went our way. But then USO tried to counter-rally… twice. The 30-day delay in tariffs on Canada and Mexico caused the U.S. dollar to weaken, working against our position. Free Trading Resources Have you checked out Larry’s free trading resources on his website? It contains a full trading glossary to help kickstart your trading career – at zero cost to you. Just click here to check it out. |
But both those moves ultimately failed… The oil price finally broke lower off the back of negative economic releases. A weakening economy means less demand for oil. USO continued to fall as buying momentum (RSI) dropped. And with our trade in good profit, we decided to bank some profits by selling half our position this week for a 31.7% gain. We kept half that position open to capture any further fall. And that proved to be the right call… Take another look: United States Oil Fund (USO) Source: eSignal (Click here to expand image) We closed out the remainder of the position later that same day for a 41.2% gain. Altogether, that resulted in a blended 36.5% gain. To be clear, we generated this gain using options. Options can magnify your profits if you get the move you’re looking for. Yet options expire… and the closer you get to expiration, the more time decay erodes their value. So that move has to happen in good time. Happily, despite fluctuations in USO’s price, we exited our position before time decay caused too much trouble. And even better news for traders is that the current uncertainty in the markets is bound to offer us countless opportunities ahead. So if you’re a paid subscriber, stay tuned for our next trades… Happy Trading, Larry Benedict
Editor, Trading With Larry Benedict | 