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Trading oil volatility thus far has proven to be a winning trade for us, with multiple trades of triple-digit profits. We hope to continue this streak with our newest United States Oil Fund LP (NYSE: USO) trade.

Since June, we have seen oil move from a high of a little over $51 to a low around $40, with it currently trading right in the middle around $45. Yet, over this same time we have seen buildups in inventories and rig counts move slightly higher. What we believe is happening is that the market is beginning to discount a deficit in production — despite the higher-than-normal levels of inventory.

Adding to the supportive price action, it has been widely speculated that Russia and Saudi Arabia have agreed to curb output ahead of the next meeting later this month. While we believe the meeting at the end of this month will prove again to be nothing more than an attempt to talk the prices higher, we remain bullish for the medium term. We expect growth data to improve in this second half of the year and a lower dollar to provide a tailwind as well.

When you receive this alert, sell to open the USO Dec. 16 $9.50 puts (USO161216P00009500), last bid at 45 cents, and buy to open the USO Dec. 16 $11 calls (USO161216C00011000), last traded at 61 cents. This paired trade should cost us around 15 cents. While we expect some volatility between now and December, we believe the risk of buying oil at the equivalent of $40 and unlimited upside provides us with a good risk/reward profile heading into the end of the year.

Sincerely,

Doug and Tom