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West Texas Intermediate (WTI) is down 5%. As of midday July 28, the October $15 puts on the United States Oil Fund LP ETF (NYSE Arca: USO) that I recommended buying when they traded at $0.50 each were up 40% and trading at $0.70 each.
Here's what's next for oil prices – and what to do with your winning USO position…
When Bad News Is Good News
Crude oil is in a bear market – again. It's down 20% from its most recent highs set on June 10.
Oil – being a commodity – mostly trades based on supply and demand. And because there's been an increasing supply of oil in the face of only a moderate pickup in global demand, oversupply is leading to further price cuts.
Thanks to an explosion of shale oil, the United States is producing 9.7 million barrels of oil a day. That new record, eclipsing the old mark set back in 1970, makes America the third-largest oil producer behind Saudi Arabia and Russia.
Additionally, Saudi Arabia and Iraq are producing at record levels themselves, and Russia is desperate for revenue, which it gets by selling its oil. Then there are prospects that disruptions in crude production in Libya could soon be reversed, and Iran is capable of adding another million barrels a day to global supply, if and when sanctions are lifted.
However you look at it, there's a lot more oil coming to market in the foreseeable future.
That's good news if you're short oil or short oil-services companies – as we are in my Short-Side Fortunes advisory service.
Or if you followed my recommendation here to buy put options on the U.S. Oil ETF…
The October $15 puts (USO151016P00015000) I recommended here had surged 40%. And with the oil supply rising, there's room for those puts to go higher – maybe a lot higher.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.